Editor's Note: This story originally appeared on Point2.
One of the first steps homebuyers are advised to take when house hunting is to set an accurate budget. A large part of this means knowing how much mortgage you can afford. Mortgage pre-qualification is the ideal way to find this out.
It’s a fairly quick and easy process, too, with no negative side effects. However, before you visit a lender to get pre-qualified for a mortgage, it’s well worth understanding exactly what it entails and the limitations that it comes with.
What Is Mortgage Pre-Qualification?
In a nutshell, mortgage pre-qualification is an estimate made by a lender that tells you roughly how much they’re willing to loan you. It’s among the most basic forms of mortgage loan inquiries, yet it’s one of the first things to do if you’re serious about buying a home.
By getting pre-qualified for a mortgage, you’ll have a much better idea of your overall homebuying budget. With this information, you’ll be able to tell if now is the right time to search for the house of your dreams or if you should wait a little longer.
In addition, it can also help you explore other mortgage options besides a conventional loan.
How Does Mortgage Pre-Qualification Work?
Getting pre-qualified for a mortgage is quick and easy and only requires you to provide a lender with basic information about your financial situation. Typically, you’ll be required to supply the following:
- Your name and address
- Contact details
- Your monthly income
- Basic data regarding your bank accounts and savings
- Any assets you own
- Your desired loan amount
- Estimated down payment amount
You can visit a lender in person to do this, but it’s also possible to do it online or over the phone. Either way, the process is almost always free.
While lenders will carry out a credit check, you won’t be required to submit a full credit report. As such, mortgage pre-qualification is considered a soft inquiry, so your credit score won’t take a hit.
Armed with the information listed above, the lender can then carry out a basic evaluation and give you an approximate idea of how much they’d be willing to lend you. However, this approximation does not guarantee that the lender will commit to lending you the cash.
It’s merely an estimate that you can use to help set a budget. They may also let you know that you don’t currently qualify for a loan.
It’s usually a quick process, and you can expect to hear back from the lender within a day or so. With a positive response, you can shift things up and either discuss mortgage pre-approval or apply for a loan outright.
If the lender turns you down, it’s clear that you need to improve your financial situation before house hunting.
Are Mortgage Pre-Qualification and Pre-Approval the Same?
While they sound similar, the two processes have different requirements and outcomes. Mortgage pre-qualification is a no-strings-attached inquiry that will give you a rough idea of how much loan you could potentially take out.
There’s no guarantee that you’ll be given the amount discussed since only a basic credit check was carried out.
This is where pre-approval comes in. Lenders will take a much closer look at your credit report, resulting in a hard inquiry that can impact your credit score slightly. You’ll also need to provide hard proof of your financial situation. Typically, lenders will ask for:
- Pay stubs
- Bank statements
- Tax records
- Proof of stable employment for at least three months
This data will all be closely scrutinized, enabling the lender to provide you with an accurate amount they’d be willing to loan you. You’ll typically get an answer within 10 business days, and if you qualify for a loan, their offer will typically be valid for up to 90 days.
This gives you a strong position when making an offer on a home, as sellers will see that you’ve more or less got the financial backing needed to make good on your offer.
However, there’s still no guarantee that you’ll receive the cash. If your financial circumstances change in the interim, the lender can renege on their offer.
When Is the Best Time to Choose Mortgage Pre-Qualification?
Mortgage pre-approval certainly puts you in a stronger position when buying, but there are still many advantages to getting pre-qualified. It all boils down to the timing. Ideally, you should begin the pre-qualification process when you start realistically thinking about buying a home.
It’s a great way to know whether you can afford to buy right now. If you don’t qualify for a loan, at least you’ll better understand what you need to improve, i.e., savings, debt management, income, etc.
If you do get pre-qualified, you’ll have a rough budget with which to work, allowing you to browse homes that you’re likely to be able to afford.
This can be a great way to see if you’re happy with what you can afford or whether you’d like to borrow more and buy a larger home or one in a more expensive neighborhood. In this case, you can work on improving your financial situation further.
On the other hand, if you’re happy with the results and feel now is the time to purchase, you can take the next step and get mortgage pre-approval.
Other Benefits of Mortgage Pre-Qualification
There are other benefits to getting pre-qualified for a mortgage beyond setting a rough budget. As a free process that won’t impact your credit score, it provides an excellent opportunity to speak with various lenders.
You can discuss your financial goals with each, enabling you to size them up and see which one you feel comfortable with and what services they offer. At this point, the lender will also prospect you as a client and may try to tempt you away from the competition with attractive loan conditions.
If you go straight for pre-approval, it’s harder to shop around. Each application requires a hard inquiry as the lender reviews your credit report. Each inquiry outside of a two-week period will reduce your credit score by a few points.
Another advantage of mortgage pre-qualification is that it can make the pre-approval process run quicker and more smoothly since you’ve already worked with the lender before. You may also be given preferential access to more attractive loan conditions.
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