How to Prequalify for a Home Loan as a First-Time Buyer | 2024

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

As you prepare to buy a home, you’ll likely wonder how to get prequalified for a home loan.

Loan prequalification 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 learning how to prequalify for a mortgage, especially if you’re a first-time home buyer, you can shop for homes within your true price range, avoiding disappointment over unaffordable options.

In this article (Skip to...)

• How to prequalify
• Prequalification vs. preapproval
• Should I prequalify or get preapproved?
• Prequalifying for more money
• Prequalification benefits
• FAQ

How to prequalify for a home loan as a first-time buyer

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 home loan 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.

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 underwriter 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 loan 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.

Tip: While this prequalification letter is helpful, it’s not as strong as a mortgage preapproval letter, which you may want to obtain later in the home-buying process.

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.

6. Move on 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.

What’s the difference between prequalification and preapproval for a home loan?

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

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.

Should I prequalify for a home loan or get preapproved?

Understanding how to prequalify for a home loan as a first-time buyer is an important initial step in your homeownership journey. However, you might also be wondering about how to get preapproved for a home loan. The choice between these two processes depends on your individual circumstances and where you are in the home purchase journey.

• Consider your timeline. If you’re in the early stages of considering homeownership and are not quite ready to buy, prequalifying for a home loan 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, home loan 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 getting prequalified for a home loan 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 prequalify for a home loan or get preapproved? If you’re just starting out and want to get an idea of your budget, prequalifying as a first-time home buyer might be the way to go.

But if you’re ready to start making offers and want to stand out to sellers, learning how to get preapproved for a home loan as a first-time buyer could be the better choice.

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

How to get preapproved for a home loan as a first-time buyer

Unlike prequalification, the preapproval process 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 (or proof of income if self employed)
• Rental history
• Contact information and
• Social Security number

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 for a home loan is a stronger indication of mortgage qualification, 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 and Loan Estimate in hand can slow down your mortgage loan application.

Visit our guide to learn how to get preapproved for a home loan as a first-time buyer.

How to get prequalified for a home loan with a higher 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.

• 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. Underwriters 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 you 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 underwriter 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 as a first-time buyer