A home purchase is an exciting step in your personal journey. Although it can be a fun time in your life, you’ll also need to accept that there is a lot of paperwork involved in the home buying process. A mortgage qualification kicks off that series of paperwork early. But taking the time to prequalify for a mortgage can help the process flow more smoothly.
Let’s take a closer look at why is it important to obtain a mortgage qualification and how you can obtain your own mortgage qualification to kick off your home search.
What does mortgage qualification mean?
A mortgage qualification essentially lets you know how much a lender is likely able to lend you. It is important to note that the dollar amount laid out in your mortgage prequalification is not a guaranteed loan offer.
Although your prequalification will not be an offer that is set in stone, it can help guide you while you are shopping for a home. Importantly, it will help you narrow your home buying search to properties that you can likely afford. With that, you can prevent yourself from falling in love with your ‘dream home’ that is just too far out of your price range.
In addition to helping you stay on budget, a mortgage qualification shows sellers and real estate agents that you are serious about buying a house. With the knowledge that you are prequalified up to a certain amount, a real estate agent will likely feel more comfortable taking the time to show properties.
However, prequalification is just the first step in the process to obtain a mortgage. After that, you’ll still need to decide on a home, initiate the closing process, part with your down payment, sign dozens of loan documents, and finalize the loan.
The difference between prequalified and preapproved
As you wade through the process of buying a home, you’ve likely heard the terms prequalification and preapproval commonly thrown around. At first glance, it is easy to assume that these terms refer to the same thing. However, there are some key differences that you should be aware of.
First, a prequalification is generally less strenuous. You’ll obtain a prequalification by filling out a quick information form with a potential lender. In fact, a prequalification can sometimes be less accurate than a preapproval if you don’t fill out your general information accurately. At this point, there is no loan officer at this point to verify your information with paperwork or a credit check.
With that, you should take a mortgage prequalification with a grain of salt. The lender is not promising to lend you that amount of money but based on the information you’ve submitted that is what they would likely be willing to lend you. But you won’t know the exact terms of the loan offer with a prequalification.
In contrast, preapprovals will require sharing more personal and financial information with the creditor. You may need to present bank statements or income verification forms to the lender in order to move forward. You’ll also need to authorize a hard credit check for a preapproval application to be finalized.
The preapproval is more difficult to obtain than a mortgage qualification. With that, you should expect more paperwork when filling out a mortgage preapproval application. But the stamp of a mortgage preapproval will carry more weight with a real estate agent and potential sellers. Plus, it will allow the closing of the mortgage process to flow more smoothly because you are essentially getting a jump start on your final mortgage application.
Who can prequalify for a mortgage?
Each lender sets its own requirements on the borrowers. With that, it is up to the lender if you are able to prequalify for a mortgage or not. But it doesn’t hurt to apply to find out if you can prequalify.
All of the information in this process is self-reported. It can be helpful to pull together your basic financial information before getting started. You’ll be asked about your credit score, income, and current debt obligations. If you have that information on hand, then the mortgage qualification process will be a breeze!
Who can be preapproved for a mortgage?
Like a prequalification, the requirements for a preapproval will also vary based on the lender. Unlike a prequalification, the information cannot be self-reported. Instead, a loan officer will verify your information before moving forward with the preapproval.
A few things that the loan officer will need to verify are your income, employment status, current debts, and current assets on hand.
What are the steps to obtain a mortgage qualification?
Now that you have a better understanding of what a mortgage qualification is, let’s take a look at how to obtain one.
1. Find a lender
The first part of the process is to shop around for the right lender. By taking the time to shop around, you’ll uncover the best interest rate opportunities. Since a small difference in your interest rate could save you thousands over the lifetime of your loan, it is critical to shop around. Even if you are planning to pay off your mortgage early, finding the best loan terms is still a good idea.
If you don’t take the time to shop around now, then you might be tempted to refinance later. Instead of working through mortgage paperwork a second time around, make sure to shop around before moving forward with a mortgage lender.
2. Provide information to the lender
Once you’ve picked out a lender, it is time to start the application process. You’ll be able to self-report your information, but pulling it together ahead of time can make things happen more quickly.
A few things that your lender will want to know are your down payment expectations, bank account status, and your quick approval for a soft credit check.
3. Find out how much you prequalify for
Once you fill out your information, you should receive a prequalification answer back very quickly. You might be surprised by the total amount that you can qualify for.
Although it can be tempting to shop for homes at the top of the prequalification limits, consider your long term financial goals. It is up to you to decide how much you really want to spend on a home. A lender may prequalify you for a larger loan. But that doesn’t mean you have to stretch your budget that far. You might prefer to put extra funds towards your retirement savings or spend it on a fun vacation.
Don’t let a mortgage prequalification tempt you into spending more on a home than you can comfortably afford. It can be tempting to splurge on this big purchase. But that might necessitate cutbacks in other areas of your life. You should be clear on your spending priorities before making an offer on a home.
The bottom line
A prequalification can help you in the home buying process. Real estate agents and sellers like to see that documentation when you start shopping for homes. But make sure that you are comfortable with the loan amount that you will be signing up for.
If you are interested in buying a home, then it is good to be aware of what prequalification is. However, it is not the only piece of the process that is important to understand. Other pieces of the home buying puzzle include your various loan options, down payment obligations, and your credit score.
Take advantage of the free resources about the home buying process on Clever Girl Finance. With the information you need, you can move forward with your home purchase confidently!