Considering buying a home? Prequalification is an important early step in the mortgage process that can impact what homes you look at. Here’s what you need to know about mortgage prequalification.

What Is Mortgage Prequalification?

During mortgage prequalification, a lender evaluates a borrower’s creditworthiness and financial capacity to determine how much money to lend to the borrower.

What Makes Prequalification Different Than Preapproval?

Mortgage prequalifications are quicker, are often provided same-day, and are based on the information provided by the borrower. Preapprovals are provided after a thorough review of the borrower’s loan application and credit information.

Through prequalifications, lenders provide an estimate of loan amount. Through preapprovals, lenders provide the exact loan amount and interest rate being offered to the borrower.

Note: Neither prequalification or preapproval is a guarantee that the borrower will receive a loan.

How Do Lenders Prequalify A Home Loan?

During the prequalification process, a borrower will be required to provide information about their income, assets, debts, and employment. The lender will also review the borrower’s credit report and credit score to assess their ability to repay the mortgage.

If the borrower meets the lender’s criteria, they will receive a prequalification letter stating a mortgage loan estimate.

How Prequalification Can Help The Home Buying Process

Determine Your Budget

Before you start shopping for a new home, you need to know how much you can afford. Prequalification helps you set a budget for your home search. Knowing your maximum loan amount can help you calculate your monthly payments and decide if you can afford a particular home.

Gain A Competitive Advantage

Mortgage prequalification can give you an advantage in a competitive real estate market. With prequalification, you have a written commitment from a lender that you qualify for a mortgage up to a certain amount. This commitment can make you more attractive to sellers, as they know you have the financial means to purchase the property.

Save Time And Energy

House hunting can be exhausting and time-consuming, especially if you don’t have a clear budget. By getting prequalified, you can save time and energy by narrowing your search to homes that fit your budget to avoid falling in love with a home that you can’t afford.

Identify Potential Issues

During the prequalification process, lenders will review your credit report, income, and debts. This process can uncover potential issues that could impact your ability to get a mortgage. For example, if you have a low credit score or high debt-to-income ratio, the lender may require you to take steps to improve your financial situation before approving your loan.

How To Prepare For Mortgage Prequalification

Check Your Credit Report

Before you apply for prequalification, check your credit report to make sure there are no errors or issues that need to be addressed. You can request a free copy of your credit report from each of the three major credit bureaus once a year.

Research Lenders

Not all lenders are created equal, so it’s important to do your research and find one that you feel comfortable working with. Look for a lender with a good reputation, competitive rates, and a prequalification process that works for you.

Be Prepared To Answer Questions

When you apply for prequalification, your lender will likely have questions about your income, debts, and other financial information. Be prepared to answer these questions honestly and thoroughly to ensure a smooth prequalification process.