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If you’re just starting your new home search, mortgage prequalification can help you better understand available mortgage options and how much house you can afford. Receiving a lender’s prequalification nod isn’t a guaranteed loan offer, but the process is straightforward and usually can be completed in just a few minutes online.
When you’re about ready to make an offer on a home, you may want to consider mortgage preapproval, which is a step closer to a loan green light. Preapproval can arm you with the confidence you need to make a competitive offer.
We’ll walk you through the mortgage prequalification process—how it differs from preapproval— and show you how it can streamline your homebuying experience.
What Is Mortgage Prequalification?
Mortgage prequalification is a way for prospective homebuyers to discover how much they may be able to borrow for a mortgage. The prequalification process also is a chance to learn about available mortgage types—like government-backed loans and mortgages for first-time homebuyers—so you know what to expect as you begin your home search.
Less involved than seeking mortgage preapproval, you’ll be required to provide the lender basic information about your finances. This may include income information, bank account information and desired down payment and mortgage amounts. Most lenders also run a soft credit check to get a general idea of your creditworthiness, which has no negative impact on your credit score
If you’re in the market for a new home, you can request a mortgage prequalification at your local bank branch or—in many cases—online. However, lenders also use prequalifications as a marketing tool by targeting creditworthy borrowers who they suspect are potentially low-risk mortgage customers. These offers typically come in the form of phone calls or mail and may include preliminary mortgage details.
Preapproval vs. Prequalification
Mortgage prequalification involves getting an estimate of how much your lender may be willing to lend based on your general creditworthiness. The prequalification process does not involve a hard credit check, and lenders typically rely on prospective borrowers to self-report basic information about their bank account balances, income sources and loan preferences.
This process is less formal than preapproval and, when completed online, can yield a response immediately—though some lenders take longer. However, because prequalification doesn’t involve an in-depth review of borrower finances, it does not guarantee you’ll be approved for a mortgage.
On the other hand, mortgage preapproval is based on a more comprehensive analysis of a prospective borrower’s financial health. To get preapproved, most lenders require applicants to provide copies of their pay stubs to establish current income, bank account numbers and recent bank statements, W-2 statements and both personal and business tax returns from the last two years.
Because the preapproval process is more comprehensive, it can take up to 10 days to complete. That said, once preapproval is complete, the lender typically provides a preapproval letter that will show you the authorized loan amount, interest rate information, the estimated down payment and, in some cases, the estimated mortgage payment.
How to Get Prequalified for a Mortgage
Getting prequalified for a mortgage typically involves self-reporting basic details about your finances to a lender. Depending on the lender, you may have to visit a branch to complete the prequalification process. However, many lenders now offer online prequalification. If you’re trying to get prequalified for a mortgage, you’ll likely have to provide information about your:
- Income. Typically when prequalifying for a mortgage, prospective homebuyers must provide general information about their annual income. This can help lenders evaluate your debt-to income ratio. For preapproval, on the other hand, borrowers need to provide more extensive documentation—employment verification, recent pay stubs, proof of additional income and W-2 wage statements and tax returns for the past two years.
- Bank account(s) and other assets. The prequalification process generally involves providing a list of bank account balances, cash on hand and other assets like retirement accounts and real estate. Like income, this demonstrates to lenders whether a borrower has the financial resources to make a down payment and mortgage payments.
- Outstanding debts. When seeking a mortgage prequalification, borrowers must also disclose how much they pay each month in debt service. This number shows lenders how much income a borrower is likely to have left over after loan payments each month, and helps them determine how much of a monthly mortgage payment is feasible.
- Anticipated down payment. In addition to providing information about their general finances, borrowers may also be asked to share the down payment they expect to make on a new home.
What Is a Prequalification Letter?
A prequalification letter is a document that lenders issue outlining how much it’s willing to lend based on a borrower’s self-reported financial information. Prospective homebuyers can use a prequalification letter to demonstrate their financial strength—and the likelihood they’ll be approved for a mortgage—to sellers. For that reason, prequalification letters typically accompany offers to buy property—especially when closing is contingent on the buyer’s ability to secure financing.
Keep in mind that preapproval letters are similar, but you’ll have to undergo a more comprehensive process to receive one. Some lenders even require borrowers to complete a formal mortgage application. For this reason, preapproval letters are more meaningful than prequalification letters, but they also take longer to receive. And, like prequalification letters, preapproval letters are still not a guaranteed loan offer.
How Does Getting Prequalified Affect Your Credit Score?
Prequalification usually involves a soft credit check, meaning it will not negatively affect your credit score. That said, getting prequalified is only the first step toward getting approved for a mortgage. To get preapproved—or approved—for a loan, your lender will ultimately run a hard credit inquiry to get a more comprehensive picture of your creditworthiness.
Pros and Cons of Mortgage Prequalification
If you’re unsure of whether getting prequalified for a mortgage is worth it, consider the pros and cons of doing so.
Pros of Mortgage Prequalification
- Helps with budgeting: Getting prequalified for a mortgage can help prospective borrowers discover how much house they can afford.
- Manages borrower expectations: Likewise, mortgage prequalification can provide borrowers a more realistic expectation of what home ownership costs.
- Makes buyers more competitive: A prequalification letter demonstrates to sellers that a potential homebuyer is likely to qualify for a mortgage. This can make a buyer’s offer more competitive by demonstrating a higher likelihood that the sale will close.
- Informative: The prequalification process can expose prospective borrowers to various mortgage products early in the homebuying process.
Cons of Mortgage Prequalification
- Provides a false sense of security: Prequalification letters aren’t based on in-depth analysis of a borrower’s finances. For that reason, they are merely an estimate and may give some homebuyers create outsized expectations.
- Not a guaranteed offer: Even though prequalification letters include an estimate of how much a lender is willing to extend, they aren’t a guaranteed loan offer.