Getting Prequalified for a Mortgage: How Does It Work, and Is It Worth It?
If you’ve ever asked yourself how much mortgage you can afford, getting prequalified is one of the first ways to find out. The process is actually pretty quick and easy, and you don’t really have anything to lose. It is worth understanding exactly what a mortgage prequalification is, though, so with that in mind, let’s find out more.
What Is a Mortgage Prequalification?
A mortgage prequalification is a lender’s estimate that lets you know how much you can take out in a loan. It’s a very basic form of loan inquiry, and if you’re looking to buy a home, it’s one of the first items you should add to your to-do list. This will give you a better idea of the budget you’ll need for purchasing a house and also allow you to explore different mortgage options.
How It Works
Applying for a mortgage prequalification is surprisingly easy. To get started, you’ll need to first shop around for several lenders. Nowadays, many banks and creditors provide online forms that take a few minutes to fill in and submit. For a prequalification, the lender will only need basic information such as:
- Your name and address
- Contact details
- A figure for your stable monthly income
- Basic data on your bank accounts, savings and other assets
- Your desired loan amount and, sometimes, how much you can put as downpayment
- A credit check
Some lenders may not take a close look at your proof of income and assets, although they can do a background check on your credit report and history. It’s worth pointing out that applying for mortgage prequalification is considered a soft inquiry and will not impact your credit score. Once the lender has all this information, they will use it to assess your creditworthiness. The data will help them determine whether they can grant you the loan you’re looking for or whether granting you a loan is feasible, to begin with.
The process itself is quite speedy, and you can expect an answer from the lender within a day or so. If the response you receive is positive, you can either pursue things further with the lender and discuss a loan application or preapproval or just leave it as a loan inquiry.
Prequalification vs. Preapproval
Although mortgage prequalification and preapproval sound similar, the two processes have different requirements and implications.
To better understand the differences, think of a prequalification as just an inquiry that tells you how much you can borrow, with no strings attached. At this stage, lenders are also prospecting you as a potential client. However, mortgage prequalification is not a guarantee that your loan will be approved or that you will be approved for the amount discussed throughout the process.
On the other hand, mortgage preapproval involves a closer look at your creditworthiness. The paperwork requirements are different, and you will need to provide pay stubs, bank statements and tax records on top of meeting the lender’s credit score requirements. All information will be closely scrutinized, and the lender will provide an answer within up to 10 business days. If you are preapproved, the lender will send you an offer, usually valid for 90 days.
Last but not least, a traditional mortgage preapproval counts as a hard inquiry, lowering your credit score by a few points, whereas mortgage prequalification does not.
Is a Mortgage Prequalification Worth It?
Absolutely! For starters, mortgage prequalification is a quick and free process that will instantly let you know just how likely you are to buy your dream home. It will let you know whether you’re in a financial position to purchase real estate or whether you should postpone it for a few more years. Buying a home can be a stressful process, but if you can dedicate an afternoon to filling in a few forms, the peace of mind it provides is well worth the time invested.
Being prequalified will also give you more leverage when dealing with sellers. It lets them know that you are committed to purchasing their property and can also leave room for negotiation. What’s more, your offer can carry more weight when compared with offers from buyers that are not prequalified, let alone preapproved.
If you manage to obtain a mortgage prequalification from a lender, it’s also worth pursuing matters further and discussing a preapproval. Keep in mind that a prequalification is no guarantee for the loan. However, a preapproval letter brings you one step closer to securing a loan and can even lock interest rates in place for the next 90 days. In fact, being prequalified can also give you preferential access to loans and speed up the preapproval process.