How to Prequalify for a Home Loan

By: Valencia Higuera Updated By: Ryan Tronier Reviewed By: Paul Centopani
April 2, 2024 - 11 min read

Why first-time home buyers should always prequalify for a home loan

As you prepare to buy a home, you’ll likely come across the term “loan prequalification.”

This is the first step in the mortgage process, where a lender provides a ballpark estimate of how much house you can afford. Mortgage prequalification is typically quick and easy. You don’t have to provide documents to the lender, and you only answer a few short questions.

By getting prequalified, you can be sure you’re shopping for homes within your true price range, and not getting your heart set on a home you won’t be able to afford.

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What is mortgage prequalification?

Getting prequalified is the earliest step in the home-buying process for many first-time buyers. When you prequalify for a home loan, you’re getting a general estimate of how much a lender will allow you to borrow.

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Prequalification gives you a clearer picture of your home-buying budget, potential interest rate, and the loan options available to you. Many first-time home buyers will start with prequalification in the early stages of their buying process, but get preapproved before seriously beginning to house hunt.

Mortgage prequalification vs. preapproval

Some people use the terms prequalify and preapproval interchangeably, yet these terms are not the same. To be clear, neither a prequalification nor a preapproval guarantees a mortgage. Even so, when you’re ready to make an offer on a property, some home sellers only accept offers from preapproved buyers.

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For both processes, you’ll provide personal and financial information to a loan officer. The difference, though, is that lenders base prequalifications on self-reported information. In other words, the lender doesn’t verify this information.

The preapproval process, on the other hand, involves financial documentation and verification. Lenders will conduct a hard credit check of your credit report, and typically request numerous documents, including:

  • Tax returns and W-2s from the past two years
  • Recent pay stubs
  • Bank statements for savings accounts and other assets
  • A copy of your driver’s license
  • Employment verification
  • Rental history
  • Contact information and
  • Social Security number
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If you have alternative sources of income, issues in your credit history, or unusual deposits in your bank account, you should be prepared to explain these anomalies to your loan officer.

A preapproval is a stronger indication of mortgage approval, which builds your credibility as a serious buyer. Some sellers and agents won’t accept offers from buyers who are not preapproved because not having lender approval in hand can slow down your mortgage loan application.

Mortgage PrequalificationMortgage Preapproval
BenefitYou can house hunt with a general idea of how much you can affordYou’re ready to make an offer on your dream home with confidence
ProcessAnswer a few questions and a soft credit checkSubmit financial documents and a hard credit check
SpeedTypically, a same-day decisionDecision within 10 business days
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Should I get prequalified or preapproved?

Deciding between mortgage prequalification and preapproval largely depends on your individual circumstances and where you are in your home buying journey. Here are a few tips to help you make the decision:

  • Consider your timeline. If you’re in the early stages of considering homeownership and are not quite ready to buy, prequalification might be the best option. It’s a quick and easy way to get a ballpark figure of what you might be able to borrow, helping you to start thinking about what you can afford
  • Evaluate your readiness to buy. If you’re ready to start seriously looking at homes and making offers, preapproval is likely the better choice. Mortgage preapproval involves a more thorough review of your finances and can make you a more attractive buyer to sellers
  • Think about the market. In a competitive housing market, having a preapproval can give you an edge over other buyers who only have a prequalification or no mortgage approval at all. Sellers are more likely to accept offers from preapproved buyers because it shows a lender’s commitment to the loan
  • Reflect on your financial situation. If you’re unsure about your financial standing or creditworthiness, starting with a prequalification can give you a better idea of whether you’re ready to take on a mortgage. If the prequalification reveals that you might not be able to borrow as much as you’d hoped, it could be a signal to spend some time improving your credit or saving for a larger down payment before moving on to preapproval

So, should you get prequalified or preapproved? If you’re just starting out and want to get an idea of your budget, prequalification might be the way to go.

But if you’re ready to start making offers and want to stand out to sellers, preapproval could be the better choice.

Remember, it’s not an either/or situation. Many home buyers start with prequalification and then move on to preapproval as they get more serious in their search.

How to prequalify for a home loan

For many home buyers, the first step to becoming homeowners is mortgage prequalification. But how do you prequalify for a home loan? The good news is that it’s a simple process that can often be done online.

Unlike preapproval, prequalification is less rigorous and lenders don’t typically require a deep dive into the buyer’s financial information. Here are the general steps to prequalify for home loans.

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1. Research potential lenders

The first step is to explore various mortgage lenders. This can include traditional banks, credit unions, and online lenders. Each lender might offer different terms and interest rates, so it’s beneficial to compare a few options to find the best fit.

When you’ve identified a few suitable lenders, look for options on their websites, like “apply online” or “get prequalified.”

2. Provide financial information

To prequalify for home loans, lenders typically request basic financial information and contact information. This could include your monthly income, assets, debt payments, and possibly your credit score range. Unlike mortgage preapproval, prequalification doesn’t usually require financial documentation to verify the information; self-reported details are often sufficient.

After you’ve submitted the online prequalification form, the lender may carry out a soft credit check. These checks don’t affect your credit score and are a way for lenders to pre-screen applicants to see if they meet the basic qualifications for homeownership.

3. Lender’s assessment

Using the personal finance details provided, the lender will assess your creditworthiness and calculate a tentative loan amount you might be eligible to borrow. This assessment might also include discussions about possible mortgage options, loan terms, and the types of interest rates available (fixed rates vs. variable rates).

4. Receive a prequalification letter

If the lender determines you’re a suitable candidate for a home loan, they will issue a prequalification letter. This document outlines the estimated loan amount you might qualify for. It’s important to note that this letter is not a guarantee of loan approval, as it’s based on preliminary financial information.

It’s wise to obtain prequalification letters from a few lenders to compare offerings. This also gives you a ballpark figure of what different lenders believe you can afford, which can be helpful in budgeting for your future home.

5. Use the mortgage prequalification to guide your house hunting

With an idea of the mortgage amount you might be eligible for, you can better focus your home search on properties within your budget. This can save time and help you set realistic expectations early in the home buying process.

7. Move to home loan preapproval (optional)

While not a required next step, many buyers choose to pursue preapproval after prequalification. Mortgage preapproval is a more detailed underwriting process where the lender verifies your financial information and credit history to provide a more concrete loan offer.

Prequalification is an informative and low-pressure first step towards homeownership. It helps buyers understand their financial standing and what they might expect when they’re ready to pursue mortgage loan approval and sets the stage for a smoother home-buying process.

How to increase your prequalified loan amount

If you’re in the early stages of the home-buying process, prequalification can help you ballpark your budget. If you don’t prequalify for the loan amounts that you were hoping for, here are a few tips to afford more house.

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  • Improve your credit score. You can raise your credit score by using less credit, paying bills on time each month, and correcting any errors on your credit report
  • Reducing your debt-to-income ratio (DTI). DTI is your monthly debt payments divided by your gross monthly income. Lenders use it to determine how much of a mortgage payment you can afford. You can lower your DTI by paying down monthly debts from student loans, auto loans, and high-interest credit card debt.
  • Increase your income. A higher monthly gross income will also improve your DTI ratio, which may result in qualifying for larger loan amounts
  • Opt for an adjustable-rate loan. These types of mortgages begin with a lower interest rate than a fixed-rate loan. But after their introductory period, the rate fluctuates with the market. Many buyers will find they can afford more home with an adjustable-rate mortgage.

Keep in mind that a home’s purchase price isn’t the only thing that impacts affordability. Your mortgage rate also plays a big role in determining how much house you can afford and what your monthly mortgage payment will be. And you won’t know your rate until you’ve talked to a lender.

Benefits of mortgage prequalification

Now that you know how to prequalify for a home loan, here are some key advantages to going through this initial step of the homeownership process.

Establish your home-buying budget

Mortgage prequalification provides a clear estimate of the loan amounts and mortgage rates that might qualify for. When you know how much you might be able to borrow early on, you are better equipped to plan for other expenses associated with buying a home, such as down payments, closing costs, and moving expenses.

Prequalification gives you a ballpark figure to work with and makes certain that you search for homes in a realistic price range and avoid potential disappointments.

Credibility with home sellers

In a competitive real estate market, standing out to sellers can make a significant difference. A prequalification letter signals to both sellers and real estate agents that you’re a serious buyer with a preliminary lender assessment backing your offer. This can make your proposal more attractive compared to those from buyers who haven’t taken this step.

Time efficiency

Mortgage prequalification is a swift process that requires minimal financial documentation, allowing you to quickly gauge your loan eligibility. You can often get prequalified online. This convenience ensures that you can confidently move forward with house hunting, without the need for extensive paperwork or commitments.

FAQ: How to prequalify for a home loan

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Do I need to prequalify for a home loan?

No, prequalifying for a home loan is not a requirement, but it is highly recommended. Prequalification gives you a clearer idea of how much you can borrow, helps narrow down your home search to fit your budget, and enhances your credibility with sellers, especially in competitive markets. It’s a useful first step in understanding your financial standing without the commitment of a formal mortgage application.

When should I prequalify for a home loan?

You should consider prequalifying for a home loan as soon as you start thinking about buying a house. Prequalification gives you an estimate of how much you might be able to borrow based on your income, debts, and credit history. This can guide your home search by giving you a realistic idea of your budget. It’s a good first step in the home buying process, even before you start working with a real estate agent or looking at properties. However, keep in mind that prequalification is just an estimate and doesn’t guarantee you’ll get the loan.

How long does prequalificaiton last?

A mortgage prequalification letter doesn’t normally expire. Unlike mortgage preapproval letters, which are usually valid for up to 90 days, a prequalification should last indefinitely as long as your financial situation doesn’t change. However, if you’ve switched employers, lost your job, or maxed out any credit cards, you should apply for prequalification again.

Does prequalification affect your credit score?

Mortgage prequalification should not affect your credit score. The three major credit bureaus consider a prequalification a soft inquiry, which means it won’t hurt your score in any way.

Can you get prequalified for a refinance?

Yes. When you prequalify for a home refinance with multiple lenders, you’ll be able to compare loan options and interest rates, along with fees for appraisal, origination, and other closing costs. Keep in mind that these loan terms will likely be updated once you lock in your true rate and submit your final loan application. But prequalifying for a refinance loan will help you comparison shop without hurting your credit score.

How do different loan programs affect the prequalification process for a home loan?

Different loan programs can significantly impact the prequalification process for a home loan. For example, an FHA loan, which is backed by the Federal Housing Administration, often allows for lower credit scores and smaller down payments than conventional loans. This can make homeownership more accessible for some buyers. However, FHA loans usually require the borrower to pay mortgage insurance, which can increase the overall cost of the loan. Using a mortgage calculator can help you understand how these factors might affect your potential monthly payments.

Get started with mortgage prequalification

Before you can get serious about buying a home, you need to know whether you’ll qualify for a loan and for how much you.

Mortgage prequalification will help you look for homes in your price range. And, when the time comes, your preapproval letter will give you the power to make a competitive offer on your dream home.

If you’re ready to buy, don’t wait on getting preapproved. Make sure you’re eligible and uncover the best mortgage rates available to you.

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Valencia Higuera
Authored By: Valencia Higuera
The Mortgage Reports contributor
Valencia Higuera is a freelance writer from Chesapeake, Virginia. As a personal finance and health junkie, she enjoys all things related to budgeting, saving money, fitness, and healthy living.
Ryan Tronier
Updated By: Ryan Tronier
The Mortgage Reports Editor
Ryan Tronier is a personal finance writer and editor. His work has been published on NBC, ABC, USATODAY, Yahoo Finance, MSN Money, and more. Ryan is the former managing editor of the finance website Sapling, as well as the former personal finance editor at Slickdeals.
Paul Centopani
Reviewed By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.