Mortgage Prequalification: What Is It And How Does It Work?

The process of applying for and closing on a mortgage can be a long one, and there are several steps throughout the process. One of the first steps in buying a home and taking out a mortgage is mortgage prequalification. A mortgage prequalification is when a lender collects some basic financial information from you to estimate how much house you can afford. While a prequalification is not a binding mortgage approval, it is an important step in the process of buying a home.

What Is Mortgage Prequalification?

During the prequalification process, a lender will collect your financial information. This can include your income, asset information and monthly debt payments. The lender will take this information to help you prequalify for a loan of a certain amount.

When you've received a mortgage prequalification, it can help you understand how much house you can realistically afford to buy. While mortgage prequalification is not required for borrowers, it can be a useful first step in the mortgage process, since it can give you an idea of what types of homes you can likely afford.

What’s The Difference Between Prequalification And Preapproval?

How Does Mortgage Prequalification Work?

The first step in mortgage prequalification is to find a lender that you’re comfortable working with. If you’re early on in the home buying process, you may get recommendations from trusted friends or family. You may also want to talk with several lenders in order to make sure that you’re finding the lender and loan program that work best for your specific situation.

Once you are working with a mortgage lender, you can begin the mortgage prequalification process. The prequalification process begins with providing your lender with the basics of your financial situation. This could include things like:

• Your demographic information, including your name, address and Social Security Number
• Your income and employment
• Any debts you have, including your monthly debt payment
• Any assets you have, including savings, checking, retirement and investment accounts

Does Prequalification Affect Your Credit Score?

Since you will generally need to provide your Social Security Number as part of the prequalification process, you might wonder whether a mortgage prequalification affects your credit score. While it is common for your lender to do a soft credit check as part of the mortgage prequalification process, this does not affect your credit score.

How Long Does A Mortgage Prequalification Last?

Why Should You Get Prequalified?

There are several reasons why you may want to get prequalified for a home loan. One of the most important reasons to get prequalified is so you can know how much home you can afford. Getting prequalified can help you narrow down home searches within a realistic price range. If you’re only prequalified for a loan of $250,000, it doesn't make a lot of sense to look for homes that are selling for $400,000 or more (unless you have a hefty down payment).

Another reason to get a mortgage prequalification is to make sure there isn't anything that will prevent you from being approved for a mortgage. This might include blemishes on your credit report, excessive debt or inconsistent income. The sooner you know about potential hiccups, the easier it might be to correct them so as not to interfere with the home buying process.

How To Get Prequalified For A Mortgage

While the steps for getting prequalified may vary by lender, here are a few of the common steps for a mortgage prequalification:

1. Gather Financial Information

First, you'll want to gather your financial information. Having all of this information in one place can help you stay organized throughout the process. While the exact information your lender will need may vary slightly, you're likely to need:

• Demographic information, including your Social Security Number
• Your last several pay stubs
• Tax returns (if you have a business or self-employment income)
• Information about any debts you have, including other mortgages, credit cards or any other debt. You'll likely need the total amount of the debt owed as well as the amount of your monthly payment.
• Information about any assets you own, including savings, checking, retirement and investment accounts
• Any bankruptcies, judgments or other similar legal actions against you in the past several years

2. Choose A Lender

While you're gathering your financial information, you'll also want to choose a mortgage lender to work with. You can ask for recommendations from trusted friends or family, or choose a local lender in your area. It can be a good idea to talk with a few different lenders and ask them about their programs. That can help you decide which lenders might be good to work with and also help you understand which mortgage program might work best for you.

3. Submit The Prequalification Form

Once you've chosen a lender and gathered your financial information, you can submit the prequalification form. The exact substance of the prequalification form may vary depending on the lender, but it will generally have you submit all of the financial information you gathered above. In some cases, your lender may be able to give you a prequalification right away, while in other cases it may take a few days for the bank to approve your prequalification.

4. Discuss Your Loan Options

Your mortgage prequalification may come with several different options you can choose from. This may include an option where you can get a lower interest rate if you choose a shorter term or have a higher down payment. You may also be able to get a lower interest rate if you choose to pay mortgage points upfront.

5. Receive Your Prequalification Letter

Once you've been approved and chosen the lending program you want to move forward with, your lender can present you with your mortgage prequalification letter. This letter can be used as part of the home buying process. Many prospective home buyers submit a prequalification letter as part of any offer they submit on a house. When you include a prequalification letter along with your offer, it lets sellers know that you’re serious about the house and likely have the ability to close on the purchase.

Tips For Raising Your Prequalification Mortgage Amount

While a mortgage prequalification is not a formal mortgage approval, it can give you an idea of how much of a mortgage you're likely to be approved for. If you don't receive the prequalification amount you’re hoping for, here are a few tips for raising your prequalification mortgage amount:

• Improve your credit score: One of the best things that you can do to raise your prequalification amount is to improve your credit score. Having a great credit score generally will allow you to get loans with lower interest rates, and a lower interest rate means you can borrow more money for the same monthly payment amount.
• Reduce existing debt: Lenders have guidelines that they must follow regarding how much debt you can have and still qualify for a mortgage. If you have too much debt, it may limit the amount that you can be prequalified for.
• Save for a larger down payment: While having a larger down payment may not affect the amount that you’re prequalified for, it can help by reducing the loan amount that you need.
• Increase your income: One of the factors that lenders look at when issuing a mortgage prequalification is your ability to make the monthly mortgage payments. Increasing your income may increase the amount of money that banks are willing to lend you.

The Bottom Line

The home buying process can be a lengthy one, with several steps along the way before you can cross the threshold of your new home. One of the first and most important steps in buying a home is getting prequalified for a mortgage. While a mortgage prequalification is not a guarantee that you will be approved for a mortgage, it can be a good indicator of how much of a mortgage you might be approved for.

Having a mortgage prequalification letter to include with any offers you put down on a home can also let sellers know that you’re a serious buyer. Mortgage prequalifications are generally good for around 60 to 90 days and don't impact your credit score.