How to Prequalify for a Home Loan
If you’re thinking about buying a home, wouldn’t it be great to know how much you can borrow before you find and fall in love with a property? Fortunately, you can do that by contacting a loan officer who can get you started with a mortgage prequalification.
Prequalification, or preapprovals (we’ll explain the difference), will inform your homebuying path and can offer key advantages when you are looking for a home to purchase.
Prequalify vs. Preapproval. What’s the Difference?
As you begin the prequalification process, you may also hear about a something called a preapproval. Often, these terms are used interchangeably, but they are not the same.
To Prequalify for a home loan, you provide information to your lender regarding your income and financial situation. As long as the information you provide is honest and accurate, you will receive an estimate of how much you could borrow to spend on a home. Keep in mind that a prequalification does not guarantee the amount you will ultimately be granted for a mortgage loan.
To get pre approval for a mortgage, on the other hand, takes a much more thorough approach to evaluating your financing eligibility. During the preapproval process, you submit documents that demonstrate you are employed, show your salary and history, and illuminate other factors important to determining your loan eligibility. The lender verifies your information, as well as your credit history, and determines what you can borrow.
While getting pre-approved for a mortgage goes a step further in identifying your borrowing capacity, it isn’t required to start the bidding process. Most sellers will accept a prequalification letter as proof of financing eligibility as well as your intent to buy. This is good news, because you can get prequalified for a home loan faster than you can get preapproved, and it typically doesn’t expire as long as your financial situation remains the same. However, in a robust seller’s market, that can change, and preapprovals become more highly regarded when multiple offers are made.
How and Why Should I Get Prequalified for Home Loan?
There are many benefits to prequalifying for a mortgage. One is that a seller will often take your offer more seriously if a lender/bank has approved financing that satisfies their asking price.
What Information is Used to Get Prequalified for a Home Loan?
How a lender determines what you can afford is a fairly straightforward process. First, the loan prequalification/preapproval process takes into account your debt-to-income ratio (DTI).
Simply put, DTI is all your monthly debts added up and divided by your gross monthly income. In general, a lender needs to see that your debts don’t make up more than 45% to 50% of your income from all sources, including wages, side/part-time jobs (another topic to discuss with your loan officer), alimony and child support, etc.
Your lender also will consider your credit score. Typically, you need to score at least 620, although applicants with scores over 740 may be eligible for better interest rates.
If your credit score or DTI don’t meet financing thresholds, you’ll be glad you spoke with your loan officer about a prequalification! Not only will you save the time and heartache of looking at properties you can’t afford, but your loan officer also can advise you on the steps you need to take to help you prequalify in the future.
Often, it’s a matter of reducing debt or saving for a larger down payment. Your loan officer can provide you with advice on how to create a savings plan as well as guidance on which debts to pay down first. Having a loan officer by your side can prove to be the edge you need to reach your homeownership goals.
Where do I Go to Get Prequalified for a Home Loan?
If you’re worried about carving out time during your workday to visit a bank for a prequalification, you’ll be happy to know that most often, the process can be completed online, on your own time, from the comfort of your home or office.
However, if you have questions or prefer more personal guidance, it’s generally easy to find a loan officer nearby, and they are always available to help by having a conversation with you about financing.
The most important takeaway: start your homebuying journey with a trusted loan officer who can walk you through the prequalification process. Then, when you fall for the home of your dreams, it will be one you know you can afford.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.