As you begin looking for your dream home, chances are you will have a real estate agent ask if you are prequalified for a mortgage. While you may not think about financing before even looking for a home, a mortgage prequalification can be a powerful tool to arm yourself with before you even take that first new home tour. But what does prequalifying for a mortgage mean and what is the primary benefit? The fact is a prequalification gives you a better idea of how much home you can really afford while also showing sellers that you are coming prepared and are a serious buyer.
What is a mortgage prequalification?
A mortgage prequalification is an estimate performed by a lender that shows how much a borrower may be approved for based on information, such as income and debt-to-income ratios, provided by the borrower. While some lenders may run a credit report and history, leaning more towards a preapproval, a traditional prequalification does not usually require a credit check and is only considered an estimate of the amount the borrower may be approved for.
Benefits of mortgage prequalification
The main benefit of a mortgage prequalification is to get a better understanding of how much home you can actually afford. This prequalification will provide you with the total amount of home you can afford, as well as give you a good idea as to what your monthly mortgage payments would be, helping to ensure that, when shopping for a home, you are not looking out of your financial reach. In addition, meeting with the lender for a prequalification ahead of your home search will also provide an opportunity to discuss potential mortgage loan options that will best fit your needs.
As you begin searching for a home, having a prequalification letter from a lender holds weight with the sellers when you decide to make an offer. In fact, many realtors will not even bother showing a home to potential buyers unless they have a prequalification or preapproval letter to show that they are serious.
Disadvantages of mortgage prequalification
While there are no real disadvantages to receiving a traditional mortgage prequalification, there are some things to consider. Some lenders will run a credit check for prequalification and too many prequalifications over a period of time can negatively impact your credit score.
In addition, you must remember that prequalification is not a guarantee. This is simply an estimate, based on financial information provided by the buyer, of what they can expect to qualify for. It does not mean that you are guaranteed approval for a loan. This is simply a tool designed to give you an idea of what you should be able to qualify for.
How to prequalify for a mortgage
Getting prequalified for a mortgage is a relatively easy process, often not even requiring any necessary paperwork submissions. Most lenders offer prequalification over the phone or through online forms where you provide the necessary information. In many cases, you will receive a prequalification within a few days or even hours. When applying, you will need to know the specific financial information described below.
Your debt-to-income ratio looks at the amount of income you have coming in versus the expenses you have coming out. To determine your debt-to-income ratio, you take your monthly expenses, including estimated mortgage payments, and divide that by your total gross monthly income. For example, if your monthly expenses were $2,750 and your monthly income was $7,800, then your debt-to-income ratio would be 35%.
While some lenders may choose to run your credit history for prequalification, many will simply ask you for your current credit score. If you do not already know your current credit score, the annualcreditreport.com website allows you to request your report every 12 months from each credit reporting company.
Down payments can range from nothing to 3.5%, 5%, or 20% or more. Knowing what you have available for a down payment on your home will allow the lender to determine which loans you may be eligible for and what listing price you can prequalify for.
You will need to provide information on all streams of income. This can include traditional employment income, self-employment, child support, or alimony.
Assets and investments
The lender will also ask about all your assets and current investments to establish your net worth when it comes to mortgage prequalification.
1. How long does prequalification last?
Because a traditional prequalification is only an estimate and not based on a credit report, it really has no expiration date as long as your financial situation does not change. However, if your lender runs a credit report and a more extensive prequalification, actually terms as a preapproval, then it is typically good for 60 to 90 days.
2. Should I get prequalified or pre-approved for a mortgage?
A prequalification for a mortgage is a simple process that is designed to show you how much home you can qualify for, giving you the information that you need when starting your new home search. A pre-approval goes one step further, requires more paperwork and a credit check, but shows that the lender is committed to providing a loan for that amount. If you are committed to purchasing a home, going the extra step for a preapproval may be beneficial.
3. Do I need a prequalification letter to buy a house?
While prequalification is not always necessary to purchase a home, many sellers and realtors now require a letter before they even offer to show the home to potential buyers. This is done to show the seller that you are serious about purchasing and have the means to actually follow through after an offer is made.
4. Does prequalification affect my credit score?
In most cases, a lender does not run a credit report for mortgage prequalification. But when they do, it is often a soft inquiry that does not negatively affect your credit score.
Buying a home with mortgage prequalification
When you begin the search for your dream home, it is a good idea to have a clear picture of your finances that includes an idea of home much home you can really afford. This knowledge allows you to keep your home searches within a specific price range and can make the home buying process much easier. A mortgage prequalification is a valuable tool that will do just that! In addition, it allows your lender to help better determine which home loans are available to you and which ones will best fit your needs.
At Hero Home Programs, we specialize in helping home buyers find the best home loans for their situation, helping to ensure they get the keys to their new dream home. Schedule a consultation with us today to learn how our team of specialists can help you find the home of your dreams.