The spring homebuying season is in full swing, with mortgage rates finally beginning to come down from their peak earlier in the year. If you’re looking to buy a home, you might be wondering how to make yourself stand out in a competitive market. Let’s discuss two essential steps you’ll need to take when seeking a mortgage: prequalification and preapproval. These processes help you determine how much you can afford to spend on a house, each serving a different purpose.
Prequalification is like a quick glance at your financial situation. It provides an initial estimate of how much you could borrow for a mortgage based on basic information you provide. On the other hand, preapproval involves a thorough examination of your finances by a lender to give you a more accurate and reliable estimate of the loan amount they are willing to offer you.
Both prequalification and preapproval are crucial steps in the homebuying process, depending on where you are in your journey. Let’s take a closer look at what each step entails and how they can give you a competitive advantage in a hot housing market.
Mortgage Prequalification:
Prequalification is a preliminary assessment of your borrowing capacity based on the information you provide, without verification from the lender. Typically, there is no hard credit check or detailed financial review required, and you generally do not need to submit any supporting documents. It helps you gauge your potential homebuying budget early in the process.
Who should consider prequalification:
Prequalification is ideal for potential homebuyers who wish to evaluate their borrowing potential quickly. It offers a convenient way to assess your financial readiness to buy a home without the need for a lengthy mortgage application process or extensive documentation.
Benefits of prequalification:
The advantages of prequalifying for a mortgage loan include:
– Quick process: You can provide your information within minutes.
– No impact on credit score: Usually involves a soft credit check or no check at all.
– Comparison shopping: Easily obtain prequalification estimates from different lenders.
– Minimal paperwork: Based on self-reported information only.
– Financial guidance: Helps you determine a homebuying budget before applying for a mortgage.
How to get started with mortgage prequalification:
To begin the prequalification process, follow these steps:
1. Contact a lender: Reach out to a bank, credit union, or mortgage lender, either online or in person.
2. Provide basic information: Share details such as your annual income, monthly debts, desired loan amount, and estimated credit score.
3. Undergo a soft credit check: Some lenders may perform a soft credit inquiry using your Social Security number, which does not impact your credit score.
4. Review your estimate: The lender will use the information provided to offer a quick estimate of your borrowing capacity.
5. Obtain a prequalification letter: You will receive a letter confirming your prequalification, which you can show to real estate agents or sellers as proof that you have taken steps with a lender and have a general idea of your potential price range
Preapproval is a more thorough process compared to prequalification when it comes to obtaining a mortgage. Mortgage preapproval involves a lender providing a conditional commitment to offer you a specific loan amount, typically valid for 90 days. This process requires completing a full mortgage application, submitting financial documents, and undergoing a hard credit check.
Prior to starting your house search, it’s important to get preapproved for a mortgage. Preapproval not only establishes a clear budget for you but also demonstrates to sellers that you are a serious and committed buyer.
Who should consider preapproval:
Preapproval is recommended for committed homebuyers prepared to make offers. However, it may not be suitable for those not yet ready to purchase a home, as it could potentially lower your credit score by up to 10 points.
Benefits of preapproval:
1. Builds trust and credibility: Sellers are more inclined to take your offer seriously when they know you have the backing of a willing lender.
2. Strengthens your position: A preapproval letter enhances your bargaining power and helps your offer stand out.
3. Establishes your budget: Preapproval offers realistic and lender-verified insights into your affordable housing options.
4. Speeds up closing: With much of the financial groundwork completed upfront, the closing process can be expedited and smoother.
5. Reduces stress: Knowing that you are preapproved can alleviate some of the stress associated with homebuying.
Steps to obtain mortgage preapproval:
1. Choose a lender: Research and prequalify with lenders to find the most competitive rates and terms.
2. Fill out an application: Complete a formal mortgage application with personal and financial details.
3. Submit required documents: Provide financial documents for verification, such as pay stubs, tax returns, and bank statements.
4. Undergo a credit check: Expect a temporary credit score dip due to a hard credit inquiry.
5. Wait for underwriting: Lenders evaluate your credit and finances to determine loan approval.
6. Receive a preapproval letter: If approved, you’ll receive a letter stating the loan amount you qualify for, valid for about 90 days.
Expert tip: Maintain financial stability and transparency during the homebuying process to ensure a successful mortgage closing. Final approval is subject to stable employment, credit score, and debt levels, which can impact your debt-to-income ratio and credit score.
Once you have made an offer on a house, the property’s appraisal must meet or exceed the purchase price of the home you are buying. A debt-to-income ratio (DTI) compares the amount of debt you owe to your gross monthly income, expressed as a percentage. Lenders use your DTI to assess your ability to repay additional debts, such as a mortgage. Typically, a DTI of 43% is the maximum percentage allowed while still qualifying for a loan.
The debt-to-income ratio (DTI) calculates how much debt you have compared to your gross monthly income, shown as a percentage. Lenders use your DTI to determine how probable it is for you to repay more debt, like a mortgage. Typically, a DTI of 43% is the highest percentage that allows you to qualify for a loan.
Delve further: Impact of a 1% mortgage rate change
Preapproval versus prequalification: A comparison and distinctions
Prequalification
Preapproval
Purpose
Sets your homebuying budget as an initial step before shopping
Provides lender-reviewed details as a crucial step for making offers on desired homes
Process type
Informal estimate only
Conditional commitment from a lender
Turnaround
Within minutes, subject to the lender
Same day or up to 7 days, depending on the lender
Application type
No formal application required
Full mortgage application
Credit check
Soft credit check may be necessary
Hard credit check is mandatory
Verification
Dependent on self-reported information only
Lender thoroughly verifies your personal and financial details with official documents
Loan amount
Offers an estimate only
Specifies an exact loan amount
Interest rate
Provides possible ranges only
Specifies the interest rate, with some lenders offering a “lock and shop” feature to secure the rate while house hunting
Validity period
None specified
Usually up to 90 days
🏡 Also in this series
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What are the monthly payments for a $500,000 mortgage?
FAQs: Mortgages, homebuying, and budgeting
Explore the process of prequalification, preapproval, and homebuying before applying for a mortgage. Additionally, peruse our collection of personal finance guides to aid in saving money, earning money, and increasing your wealth.
Does mortgage prequalification guarantee approval?
No, prequalification provides an informal estimate and does not ensure mortgage approval. To ascertain approval, you must submit a formal mortgage application.
Which should come first: mortgage prequalification or preapproval?
While some lenders may use these terms interchangeably, prequalification typically precedes preapproval in the mortgage process. Prequalification provides an estimated borrowing amount, while preapproval results from a complete mortgage application and offers a written statement from lenders willing to extend a loan for a home purchase.
What is a mortgage rate lock, and how does it work with preapproval
When you fill out an application, your date of birth is commonly requested along with other personal information. Lenders and creditors use this information, along with factors like income and credit score, to assess your eligibility for a loan or credit. Your age on its own cannot be the sole reason for rejecting your application; the minimum age requirement is 18 years old. For more insights on obtaining mortgage approval during retirement, check out our comprehensive guide.
Is it wise to seek preapproval from multiple lenders? It can be beneficial. By obtaining several preapprovals, you can compare offers to secure the best rates and terms that align with your property, budget, and objectives. Unlike applying for various forms of credit, multiple mortgage preapprovals made within a short timeframe (typically 14 to 45 days) may be treated as a single credit inquiry by credit bureaus. Consequently, this has a minimal impact on your credit score, even if you submit applications to multiple lenders.
What happens to your mortgage in the event of your death? Mortgages are handled differently from other debts. However, crafting a will and establishing an estate plan can significantly influence the fate of your mortgaged property after your passing, as well as the extent of assets you can leave to your surviving family members. For valuable insights on managing mortgages after a death and preempting complications for your loved ones, delve into our comprehensive guide.
Are you eligible for a homebuyer program if you’ve previously owned a home? Absolutely! There are numerous homebuyer programs tailored for senior buyers and retirees, regardless of whether they’ve owned a home before or require assistance in paying off their current property. These programs often have flexible criteria regarding what constitutes a “first-time” homebuyer. To explore eligibility criteria, available assistance options, and resources for homebuyer support, refer to our guide on homebuyer assistance.
Meet the author, Kat Aoki, a seasoned finance writer known for her extensive work in simplifying complex topics related to technology, fintech, banking, lending, and investments. Kat’s expertise has been showcased on various platforms including Lifewire and Finder, with her articles appearing on prominent technology brands in the United States and Australia. Her primary goal is to empower consumers and business owners to make well-informed decisions when selecting financial products that suit their unique requirements.
This article has been reviewed by Kelly Suzan Waggoner. Your questions and feedback are always welcome as we strive to enhance this page and our original content.
