What does it mean to prequalify for a home loan?
When you’re preparing to buy a home, you’ll likely come across the term “loan prequalification.” This is the first step in the mortgage process, where a lender provides a rough estimate of how much home you can afford.
Prequalification is usually quick and easy – you don’t have to provide any documents to the lender, just answer a few short questions.
By being prequalified, you can be sure that you’re buying homes in your true price range and not focusing on a home you can’t afford.
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Why prequalify for a home loan?
Prequalifying for a mortgage is not only useful for getting a rough estimate of affordability. This can be the first step in your home buying process and an opportunity to shop around and compare loan offers.
The purchase price of a home isn’t the only factor that determines your monthly mortgage payment. Your mortgage rate also plays an important role.
Your mortgage interest rate is the percentage of your loan principal balance that you will pay to your mortgage agent in exchange for borrowing money to buy a new home. This influences the amount you pay on a monthly basis and the duration of the loan.
Knowing your rate and prequalified loan amount is a crucial first step in finding a home, as it allows you to research homes and make offers within your price range.
How to prequalify for a mortgage
If you’re a first-time home buyer, being prequalified can seem daunting. But the process is relatively easy.
In most cases, you don’t have to meet a lender in person. Many banks and mortgage companies have online prequalification forms that only take a few minutes to complete.
Steps to prequalify as a first-time homebuyer:
- Visit a lender’s website and complete the prequalification form. Select the “apply online” or “get prequalified” link
- Next, provide the lender with basic financial information. This includes your total monthly income (before taxes), your additional sources of income, and your monthly debt payments.
- Once you have submitted the online prequalification form, the lender can perform a soft credit check. These credit checks do not affect your credit score. This is how a lender screens applicants to see if they meet the minimum requirements for home ownership
If you meet the loan requirements based on your credit profile and the information you provide, the lender will issue a prequalification stating your likely interest rate and the maximum loan amount you can borrow.
Attention, a pre-qualification is do not a commitment to lend you money from the lender.
The loan rate and amount offered to you is not binding until you have completed a complete application and submitted all your financial documents. The lender’s underwriting process will verify your eligibility, rate and loan size.
However, prequalifying is a helpful first step in determining your home buying budget and getting you on the right track to finding a home.
Do I need to be prequalified?
You might be wondering if pre-qualification is really necessary when buying a home? The short answer is no.
There is no rule that says you have to be prequalified before buying a home. However, prequalification has its advantages.
Being prequalified gives you clues about potential mortgage eligibility, as well as an idea of your home buying budget. This is essential information, especially if you are wondering if you have enough income to buy a house.
For example, after a review of your prequalification form, a lender might say that you are prequalified for a mortgage up to $150,000.
If you think you can find a suitable property in this price range, you can continue with the mortgage application process. Otherwise, you could postpone the mortgage and wait for your financial situation to improve.
But while a prequalification is a useful first step and provides budget information, it doesn’t carry as much weight as a preapproval.
“Even though it’s not a necessity, prequalifying is always a good thing to do before shopping for fares, especially if you’re not preapproved,” says Jon Meyer, The Mortgage Reports Loan Expert and Certified MLO. “Being prequalified will help you understand your limits.”
Prequalified vs Preapproved: What’s the Difference?
Some people use the terms prequalification and preapproval interchangeably, but these terms are not the same.
To be clear, neither pre-qualification nor pre-approval guarantees a mortgage. Even so, when you’re ready to make an offer on a property, some home sellers only accept offers from pre-approved buyers.
In a competitive housing market, a seller may choose a pre-approved buyer over a pre-qualified buyer.
For both processes, you will provide personal and financial information to a loan officer. The difference, however, is that lenders base prequalifications on self-reported information. In other words, the lender does not verify this information
The pre-approval process, on the other hand, involves verification of reported income. Lenders will perform a thorough credit check, analyze your credit report, and review supporting documents such as your W-2s, tax returns, social security number, and bank account statements.
A pre-approval is a stronger indication of mortgage approval, which boosts your credibility as a serious buyer. For this reason, in a multiple offer scenario, a seller may choose a pre-approved buyer rather than a pre-qualified buyer.
When do I need to be prequalified?
Some people are prequalified when they casually look at homes or want to get a general idea of their future budget.
Keep in mind that prequalification is not always necessary. If you’re ready to buy, you can skip this process altogether and apply for a mortgage pre-approval instead.
When should you be pre-approved?
The best time to get pre-approved is a few weeks or months before purchase. You shouldn’t be pre-approved too soon. In most cases, a pre-approval letter has an expiration date – usually around 30-60 business days, depending on your lender.
You should also get pre-approved before meeting with a real estate agent and actively looking for homes. If you don’t know your budget, you could potentially bid on a house you can’t afford.
Additionally, a pre-approval provides additional information to help you prepare for a purchase. You will not only receive information on loan terms and amounts, but also estimates for interest rates, down payment amounts and monthly mortgage payments.
How to get pre-approved for a home loan
To prepare for pre-approval, gather your documents early and submit them to a mortgage lender in a timely manner.
Borrowers generally need to submit the following documents with their mortgage application:
- Tax returns and W-2s for the past two years
- Recent payslips
- Bank statements for savings accounts and other assets
- A copy of your driving license
- Employment Verification
- Rental history
- Personal information such as your address and social security number
Depending on your situation, you may also provide a gift letter, year-to-date profit and loss statement (if you are self-employed), and court-ordered information about child support or child support, if you use this income. for qualifying purposes.
If you have other sources of income, problems with your credit history, or unusual deposits in your bank account, you should be prepared to explain these abnormalities to your loan officer.
What are the minimum requirements for loan approval?
Before you apply, it’s also helpful to understand the minimum requirements for getting a mortgage.
These requirements vary depending on your type of loan. But you will generally need a minimum credit score of 620 for a conventional home loan and a VA home loan; 580 for an FHA loan; and 640 for a USDA home loan.
These days, most mortgage programs also require a minimum down payment.
Down payments can range from 3% to 5% for a conventional loan and start at 3.5% for an FHA home loan. VA and USDA home loans do not require a down payment.
New homeowners are also responsible for closing costs, which typically cost an additional 2-5% of the loan amount. You’ll usually pay closing costs up front, or you may be able to roll them into your mortgage.
Additionally, most mortgage programs require at least 24 consecutive months of employment, and your debt-to-income ratio (DTI) must meet the minimum qualification for the loan program – typically no more than 36% to 43%. .
Mortgage lenders will focus on many aspects of your personal finances, but your credit score and DTI are key. You can improve both of these scores in the months leading up to your homeownership journey by paying off as much debt as possible, such as high-interest credit card debt, student loans, and any installment loans. .
Check your mortgage eligibility
Before you get serious about buying a home, you need to know if you qualify for financing and how much you can borrow.
Mortgage prequalification will help you search for homes in your price range. And, when the time comes, your pre-approval letter will empower you to make a competitive offer on your dream home.
If you’re ready to buy, don’t wait to be pre-approved. Make sure you qualify and check your loan options and interest rates. Experiment with a home affordability calculator or start the process online in just minutes.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.