Buying a home can be a lengthy process, but one way to speed up getting it is to prequalify. Mortgage prequalification one step away from preliminary approvalbut has its advantages. This is what prequalification is and why you might want to prequalify for a mortgage.
What is Mortgage Prequalification?
Mortgage prequalification is an estimate of the amount a borrower can be approved for based on income and other underlying factors. The prequalification process is easier than pre-approval processand this can usually be done via a phone call or an online form that provides the lender with some financial information.
Pros of prequalifying mortgages
You will get an idea of your budget
One of the benefits of going through the prequalification process is that you will have a general understanding of what can you afford before buying for a home, says McKregger, senior vice president and regional manager Home loan in angel oak in Atlanta.
You will avoid the shock of stickers if you go through this process earlier, especially if you are buying your first home.
“At times, buyers may have an unrealistic view of payments for a particular home due to the fact that some information about mortgage payments may appear on the Internet,” said Craig Garcia, president of Capital Partners Mortgage in Coral Springs, Florida. “Knowing exactly what a realistic home payment is can help buyers focus on properties that actually fit their budget desires or constraints.”
“You may also know where you stand with the final costs,” says Abel Carrasco, lender at Homeowners Financial Group in St. Petersburg, Florida.
“Understanding how much money you need to close a deal, including the down payment and closing costs, will help you better manage your costs and help you design a course that will help you achieve your goal of owning a home,” says Carrasco.
You could be in a stronger position
Prequalification can help you “improve your bargaining power with the seller,” says Peter Boomer, head of mortgage at the company. PNC Bank – although pre-approval has a lot more weight these days.
However, prequalification can help the salesperson know that “you are serious about the case,” says Carrasco.
“It’s not uncommon in this market for sellers and their realtors to insist on getting a pre-qualification letter before you are allowed to inspect a home,” says Carrasco. “In a hot market, sellers do not want to waste their time preparing their home for display and only leave to drive through their home with no funds or intentions to buy it.”
You can find out more about your options
While prequalification is not a formal process like pre-approval, it gives the borrower the opportunity to provide the lender with some information about income, assets and liabilities, says Kregger.
Now that the lender has this information, you can inquire about the different types of mortgages that are appropriate for your situation, and possibly any first-time homebuyer programs or the help you are applying for.
“You may be able to complete the purchase with a lower down payment than you anticipated, or perhaps your credit is in better condition than you thought,” Garcia says. “Understanding your options helps you make better decisions when it comes to choosing a home.”
Cons of prequalifying a mortgage loan
It can affect your credit score
If you prequalify multiple times over an extended period, such as once in January and again in June, your credit rating will be affected. This is not ideal as you want to apply for a loan with the best rate and conditions.
However, if you pre-qualify for a mortgage within a shorter period of time, it will have little impact on your outcome. This is because credit rating models group requests over a shorter period, usually 30 days, into a single request for your credit report. This means that you should make all purchases in a short amount of time if you can.
“It is your right as a consumer to be able to shop between lenders to make sure you are getting competitive quotes,” says Carrasco.
Once the lender takes your loan, the same report will be used for underwriting if you submit a full mortgage application – and the lender won’t need to pick it up again as the report is valid for 120 days, adds Carrasco.
Nothing is guaranteed
There is no clear standard in the mortgage industry as to what exactly is prequalification or pre-approval, Garcia said.
Most mortgage lenders view prequalification as a preliminary overview of the needs and qualifications of the borrower, designed to give the borrower an idea of the possibilities. In other words, prequalification does not mean that you are guaranteed to get a loan. In fact, if the prequalification process isn’t as important as pre-approval, or doesn’t provide enough details about your financial situation, you may still be denied. Thus, prequalification can give a false sense of security.
If you’ve been prequalified and narrowed down your home searches, it’s time to get pre-approved.
During the pre-approval process, the lender reviews your credit report and financial situation and approves the specific mortgage amount for you. To do this, you need to provide more detailed information, including documentation of employment, car loans and student loans, total savings, and other debts such as credit cards.