What does it mean to pre-qualify for a loan?
When you are preparing to buy a home, you will likely come across the term “pre-qualified for a loan”. This is the first step in the mortgage process, where a lender provides a rough estimate of how much home you can afford.
Prequalification is usually quick and easy – you don’t have to provide the lender with any documents, just answer a few short questions.
By prequalifying yourself, you can be sure that you are shopping for homes in your true price range and not worrying about a home you can’t afford.
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How to pre-qualify for a loan
Prequalifying for a mortgage is not only helpful in getting a rough estimate of affordability. This is also an opportunity to shop around and compare credit offers.
The selling price of a house is not the only factor that determines your monthly payment. Your mortgage interest rate also plays an important role. It affects the amount you pay monthly and the length of the loan.
If you’re a first-time home buyer, getting prequalified can seem daunting. But the process is relatively straightforward.
And in most cases, you don’t have to meet with a lender in person. Many banks and mortgage companies have online prequalification forms that only take a few minutes to complete.
Here’s how to pre-qualify for a mortgage:
- Visit a lender’s website and complete the prequalification form. Select the link “apply online” or “be prequalified”
- Then provide the lender with basic financial information. This includes your total monthly income (before taxes), additional income sources, and monthly debt payments.
- Once you submit the online prequalification form, the lender will perform a flexible credit check. These credit checks have no impact on your credit score. This is how a lender pre-selects applicants to see if they meet the minimum requirements for a loan.
If you meet the loan requirements based on your credit profile and the information you provide, the lender will issue a prequalification showing your likely interest rate and the maximum loan amount you can borrow.
Note, a prequalification is do not a commitment from the lender to lend you money.
The rate and loan amount offered to you is not binding until you complete a full application and submit all of your financial documents. The lender’s underwriting process will verify your eligibility, rate, and loan size.
However, prequalification is a useful first step in determining your home buying budget and getting you on the right track to finding a home.
Do I have to be pre-qualified?
You might be wondering, is prequalification really necessary when buying a home? The short answer is no.
There is no rule that says you must be prequalified before buying a home. However, a prequalification has its advantages.
Getting prequalified gives you clues to potential mortgage eligibility, as well as an idea of your home buying budget. This is information to know, especially if you are wondering if you have enough income to buy a home.
For example, after reviewing your prequalification form, a lender might say that you are prequalified for a mortgage loan of up to $ 150,000.
If you think you can find a suitable property in this price range, you can proceed with the mortgage. Otherwise, you could postpone the mortgage and wait for your financial situation to improve.
But while a prequalification is a useful first step and provides information on budgets, it doesn’t carry as much weight as a pre-approval.
Pre-Qualified vs. Pre-Approved: What’s the Difference?
Some people use the terms prequalification and pre-approval interchangeably, but the terms are not the same.
To be clear, neither a prequalification nor a pre-approval guarantees a mortgage. Even so, when you’re ready to bid on a property, some sellers only accept offers from pre-approved buyers.
For both processes, you fill out a form and provide your financial information. The difference, however, is that lenders base prequalifications on self-reported information. In other words, the lender does not verify this information
In a competitive housing market, a seller may choose a pre-approved buyer over a pre-qualified buyer.
Pre-approvals, on the other hand, involve verifying reported income. Lenders will perform a rigorous credit check, analyze your credit report, and review supporting documents such as your W-2s, tax returns, and bank account statements.
A pre-approval is a stronger indication of the approval of the mortgage loan, which strengthens your credibility as a buyer. For this reason, in a multiple offer scenario, a seller may choose a pre-approved buyer over a pre-qualified buyer.
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When should I be prequalified?
Some people are prequalified when looking for accommodation or want to get a general idea of their future budget.
Keep in mind that a prequalification is not always necessary. If you’re ready to buy, you can skip this process entirely and apply for mortgage pre-approval instead.
When should you be pre-approved?
The best time to get pre-approved is a few weeks or months before purchase. You shouldn’t get pre-approved too early. In most cases, a pre-approval will expire after approximately 90 days.
You also need to get pre-approved before you meet with a real estate agent and actively review homes. If you don’t know your budget, you could potentially bid on a home you can’t afford.
Plus, a pre-approval provides additional information to help you prepare for a purchase. You will not only receive information on loan amounts, but also estimates regarding interest rates, down payments and monthly mortgage payments.
To prepare for a pre-approval, gather your documents early and submit them to a mortgage lender in a timely manner.
Borrowers are generally required to submit the following documents with their mortgage application:
- Tax and W-2 declarations for the last two years
- Recent pay stubs
- Bank statements for savings accounts and other assets
- A copy of your driver’s license
- Employment verification
- Rental history
Depending on your situation, you can also provide a gift letter, an up-to-date income statement (if you are self-employed), as well as court-ordered information about alimony or child support, if you use this income. for qualification purposes.
If you have other sources of income, problems with your credit history, or unusual deposits in your bank account, you should be prepared to explain these anomalies to your loan officer.
What are the minimum requirements for loan approval?
Before applying, it is also helpful to understand the minimum requirements for getting a mortgage.
These requirements vary depending on your type of loan. But you will generally need a minimum credit score of 620 for a conventional home loan and a VA home loan; 580 for an FHA home loan; and 640 for a USDA home loan.
Most mortgage programs these days also require a minimum down payment.
These can range from 3% to 5% for a conventional loan, and start at 3.5% for an FHA home loan. VA and USDA home loans do not require a down payment.
New homeowners are also responsible for closing costs, which typically cost 2% to 5% of the loan amount.
Additionally, most mortgage loan programs require at least 24 consecutive months of employment, and your debt-to-equity ratio must meet the minimum qualification for the loan program – typically no more than 36% to 43%.
Check your mortgage eligibility
Before you can seriously buy a home, you need to know if you will qualify for financing and how much you can borrow.
Mortgage prequalification will help you find homes in your price range. And when the time comes, your pre-approval letter will empower you to bid competitively on your dream home.
If you’re ready to buy, don’t wait to get pre-approved. Make sure you’re eligible and check your loan options and interest rates. You can start the process online in just a few minutes.
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