What Is Prequalification for Mortgage?
Purchasing a home is the greatest investment most people will make in their lifetimes. The process of obtaining a mortgage can be long, difficult and confusing. Becoming prequalified for a mortgage allows you to start the process of shopping for a home with a rough understanding of how much money a bank may be willing to lend. Prequalification is a useful tool for making smart financial decisions.
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What is prequalification?
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Prequalification is designed to take your financial temperature--it provides a sense of how much you can afford to spend on a home. When you seek prequalification, you are basically asking a bank to attest to the fact that, in theory, you should be able to afford a home worth a certain amount.
For example, you may start the home-buying process by deciding that you want to search for homes that cost approximately $250,000. As part of the prequalification process, a bank will ask for information on your income, your current debt obligations and how much you need to borrow. Then the bank will make a determination on whether you will be able to afford the mortgage you may eventually seek. If you will be able to afford it, the bank may declare you "prequalified." You are under no obligation to close a loan with a bank that prequalifies you.
Prequalification vs. Preapproval
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One of the greatest confusions in the mortgage process involves the difference between prequalification and preapproval. Prequalification is simply a determination from a bank that you are able to afford a mortgage of a certain size. By contrast, preapproval is a much more thorough process. With preapproval, a bank has most likely checked your credit, verified your income, assets and debt, and made a determination that, if you found a house tomorrow that you wanted to purchase, the bank would be able to provide the mortgage. With prequalification, a bank is making no such commitment--it is simply offering a professional opinion that you can afford a home of a certain value.
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Which Banks Can Prequalify Me?
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Nearly any bank or broker offering mortgage services will provide prequalification. The process may last just several minutes. While you are under no obligation to close a loan with a bank that prequalifies you, it makes sense to go through the process with a bank that you would at least consider. That way, if you do decide to proceed with the mortgage process, the bank already has some of your information.
Cost
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It shouldn't cost anything to become prequalified. Banks are usually very happy to offer the service--after all, you have essentially become a sales lead for that bank. If you're being asked to pay for prequalification, check around with some other banks.
How Prequalification Helps
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Prequalification helps you buy a home in a couple different ways. First, it helps you get a better idea of what you can afford. You may be able to fool yourself into thinking you can afford a larger house than you can, but you can't fool the bank.
Second, prequalification gives you leverage when bidding on a home. It shows you are a serious buyer. If someone selling a home has received a bid from you and someone who is not prequalified, that seller may be more likely to accept your bid. After all, the seller has no assurances that the other party can even afford the home.
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