What is mortgage prequalification?

Key takeaways

• Mortgage prequalification is a quick estimate of how much money a lender might lend you for a home purchase.
• Prequalification doesn’t require paperwork or a hard credit check, so it won’t negatively impact your credit score.
• Unlike preapproval, prequalification holds little weight when making an offer on a home.

What is mortgage prequalification?

Mortgage prequalification is a mortgage lender’s estimate of how much house you can afford based mostly on your self-reported financial information. It’s a preliminary indication that you’ll be approved for a loan and how much you might expect to receive. If you’re unsure of your homebuying budget, prequalification can help you zero in on a number.

However, prequalification is not a guarantee. Since there’s no hard credit check involved, the lender relies mainly on what you tell them, so it’s less reliable than mortgage preapproval. Prequalification is also different from an official application. You’ll apply for a mortgage after a seller accepts your offer on a home.

How to prequalify for a mortgage

Most prospective homebuyers seek a mortgage prequalification online, at the lender’s website, or by phone. To prequalify for a mortgage, you’ll need to provide the lender with information about your:

• Income
• Employment
• Monthly debts or obligations
• Financial assets: savings, checking, retirement and investment accounts
• Planned down payment
• History of bankruptcies, if applicable

You’ll also be asked for proof of identity, often using your Social Security number.

The process is quick. The lender evaluates your info, often running a soft credit check. You should have your answer within minutes.

Requirements for mortgage prequalification

Anyone can apply to prequalify for a mortgage, but you’re more likely to get the results you want if you meet certain financial criteria. For example, if you’re hoping to get a conventional loan, most lenders prefer you have a credit score of at least 620 and a debt-to-income (DTI) ratio of no more than 45 percent.

Mortgage prequalification vs. preapproval

While they sound a lot alike — and are sometimes used interchangeably — prequalification is not the same as preapproval.

The key differences between preapprovals and prequalifications include:

Prequalification Preapproval Lenders rely on your word and a soft credit check. Lenders rely on a hard credit check and other documentation proving your income and debt. Can take as little as a few minutes. Can take up to 10 days. Doesn’t result in an estimated interest rate. Often results in an estimated interest rate. Usually not required by sellers and doesn’t carry a lot of weight. Carries a lot of weight with sellers and is sometimes required.

Why get prequalified?

Getting prequalified has a few advantages.

• It can help you establish a ballpark homebuying budget: If you have a sense of how much you can finance, it’ll help you determine how much home you can afford overall — and avoid looking at houses outside your price range.
• It gives you insight into whether your credit or finances need beefing up. That way, when you’re ready to apply for a loan, you might qualify for a larger amount or a better interest rate.
• It can help expedite the preapproval process. You’ll know what sort of info the lender wants and can be ready with figures and documents.

However, you don’t need to get prequalified, and it’s not a substitute for preapproval — which can be required by real estate agents or sellers, especially in a competitive market. If you have a clear sense of your price range, have compared lenders and have gotten your finances in shape, you can skip prequalification and apply for preapproval.

FAQ

• Does getting prequalified affect your credit score? A mortgage prequalification usually only involves a soft credit check, which doesn’t impact your score. Preapproval, on the other hand, involves a hard credit check, which will temporarily lower your score. If you’re shopping around for rate quotes from multiple lenders — which you should do — your credit score will only be affected by the first application, provided you apply for them all within a 45-day window.
• How long does prequalification last? Each lender sets different standards, but most prequalifications and preapprovals last 30 to 90 days.
• What should I do next after getting prequalified? Once you prequalify for a home loan and are ready to house hunt, get preapproved. Preapproval is more involved than prequalification and involves submitting documentation so your lender can assess your financial situation. Once you’re preapproved, you’ll be in a great place to start making offers on homes, submit your official mortgage application and complete the purchase.

Additional reporting by Elizabeth Rivelli