If you’re like most Americans, you’ll probably need a mortgage to buy a house. And before you start shopping for your dream home, you need to figure out how much you can realistically afford. That’s where mortgage prequalification comes in.
We’ll break down how to prequalify for a mortgage and how prequalifying for a mortgage differs from getting preapproved for a mortgage so you can start your home-buying journey the right way.
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What is mortgage prequalification?
Mortgage prequalification is a lender’s informal assessment of how much money you might be able to borrow to buy a home. Lenders will prequalify you based on the financial information you provide, like your income, debt, savings, and assets. During prequalification, the lender often takes what you say at face value and gives you a rough estimate of the loan amount you may qualify for.
The process is free, takes a few minutes, and doesn’t require you to submit any paperwork or financial documents. Many lenders offer online prequalification tools, and most use a soft credit inquiry, which doesn’t affect your credit score.
Prequalification vs. preapproval: What’s the difference?
Prequalification and preapproval are two terms often used interchangeably. However, they’re two distinct steps in the mortgage approval process.
Again, a prequalification is an informal estimate of how much a lender might be willing to let you borrow if you were to qualify for a mortgage loan. The lender provides the estimate based on your financial situation. No proof is required.
On the other hand, a preapproval requires verified information about your finances. You’ll have to provide several documents, including W-2s, pay stubs, bank statements, tax returns, and records of your debts. The lender will also check your credit score. If approved, you’ll receive a preapproval letter stating the loan amount you can borrow.
In short, a prequalification makes sense when you’re in the early stages and just want to know a budget to work with. A preapproval is the next step once you’re ready to start hunting for your dream house.
When should you prequalify for a mortgage?
Many homebuyers wait too long to prequalify for a mortgage and later realize they should have done it earlier. Even if you’re only thinking of buying a home in the next 12 months, it’s worth getting prequalified sooner rather than later.
Ideally, you should prequalify for a mortgage six to 12 months before you plan to buy. This way, you’ll have enough time to fix any issues that could give you more favorable mortgage terms. For example, improving your credit score could mean lower interest, or reducing your debt could increase your affordability. Catching these issues early will give you time to fix them before you’re ready to buy.
Even if your finances are in good shape, prequalifying early can help you house hunt with more clarity. It gives you a high-level overview of how much you can afford, so you can focus your search on homes within your budget.
Does prequalifying for a mortgage affect your credit score?
Lenders run a soft credit check during prequalification. This will show up in your credit report, but it won’t impact your credit score.
That’s why prequalifying is a safe, low-risk first step for those starting their homeownership journey. You get a rough estimate of the mortgage loan without any negative impact on your credit report.
If you decide to move forward and get preapproved, lenders will perform a hard credit check, which can temporarily lower your credit score by a few points. However, if you get preapproved by multiple lenders within the same period, it will count as a single hard inquiry.
How to prequalify for a mortgage
Prequalifying for a mortgage is a simple process that’s useful if you want to better understand your financial standing before getting serious about buying a home. Here’s how to prequalify for a mortgage:
Choose a lender to work with
You don’t need to commit to a lender at this stage, but you need to choose one or multiple to run your prequalification. This could be your bank, credit union, an online lender, or a local mortgage broker.
Share your financial information
Most lenders will ask for your financial information, which may include proof of income, monthly debt payments, how much you’ve saved for a down payment, and your current employment situation.
You’ll submit this information through an online form or speak with a loan officer. You don’t need to submit any documents or proof; the lender will use the details you provide to determine how much you can borrow.
Authorize a credit check
Nearly all lenders will run a soft credit inquiry to review your credit score and general credit health. This won't affect your credit score, but it helps the lender give you a more accurate estimate. If you’re unsure whether they’re doing a soft or hard pull, ask upfront.
Receive an estimate
Based on the information you provide, the lender will give you an estimate of the loan amount you may qualify for, potential monthly payment ranges, and possible interest rates. Keep in mind that this estimate is not formal.
Remember, mortgage prequalification doesn’t require paperwork and involves a soft credit check that won’t negatively impact your credit score. So, you can get prequalified by multiple lenders. Feel free to shop around, as you may get different loan estimates.
Use the results to plan your next move
You can use the prequalification to plan your next move. Identify and fix any financial gaps before you take the next step. When you’re ready to move on to the preapproval process, start gathering your documents.
How long does mortgage prequalification take?
Prequalification is one of the fastest parts of the mortgage process. In many cases, it takes less than a day, and sometimes just minutes if you’re applying online.
Because you’re not submitting documents for verification, lenders respond quickly. Some offer instant estimates once you complete their form. Others might follow up with a phone call to clarify your answers before giving you your mortgage potential.
Should you get prequalified for a mortgage by more than one lender?
Yes, prequalification is a great way to compare lenders without risk. Since it typically involves a soft credit check, shopping around won’t hurt your score. You can see how different lenders estimate your borrowing power, what interest rates they might offer, and what loan programs they suggest based on your situation.
Just remember to stay consistent when sharing your financial information across lenders. That way, you’re comparing apples to apples.
Next step: Get preapproved
Mortgage prequalification is a good first step if you want a general estimate of how much mortgage you may be able to borrow. And the best part is that the process takes a few minutes and doesn’t require documents for verification. You can use the estimate to hunt for houses within your budget.
When you’re ready to proceed with the home-buying process, the next step is getting preapproved. With a mortgage preapproval letter, sellers will see you as a serious buyer.
Before applying for preapproval, make sure you have all the documents to verify your financial information. This includes W-2s, pay stubs, bank statements, tax returns, and records of your debts. Also, consider submitting applications with multiple lenders to compare principal and interest and other terms.