You may have heard that you should get pre-qualified for a new mortgage before you begin seriously searching for your next home. Through the pre-qualification process, you can compare loan programs and determine which bank or lender you wish to use for financing your upcoming real estate purchase. While getting a mortgage pre-qualification is a common preliminary step in the purchase process, many buyers are uncertain about what it means to get pre-qualified.
What Is a Pre-Qualification?
When you contact a lender to get pre-qualified for a mortgage, you may be asked to complete a loan application. Through this application, you will provide information about your income, employment history, debts and other relevant information. You could provide this information online or over the phone to a mortgage professional. A pre-qualification gives the lender a basic idea about if you could qualify for a specific loan program, but it is not a firm approval. In many cases, you will need to take this a step further by agreeing to a review of your credit report before you can receive a conditional pre-approval letter. Your real estate agent may use the pre-approval letter to strengthen your offer on a new home.
When to Get Pre-Qualified for a Mortgage
The best time to get pre-qualified for a mortgage is before you begin looking at listings. This process can give you a fair idea about the sales price range that you can reasonably look at. It can also help you to estimate your mortgage payment, closing costs and down payment amount. However, when you get serious about your search, you should take this a step further by getting a pre-approval letter.
The Difference Between Pre-Qualification and Affordability
When a lender reviews your loan request, a determination is made about whether or not you meet the lender’s specific guidelines. This includes factors like your debt-to-income ratio, your available liquid assets, your credit scores and more. The lender is not reviewing your loan request to determine if the mortgage is affordable for you based on how you allocate every dime you earn. Consider that the lender’s debt-to-income ratio does not take into account childcare expenses, your preferred savings rate, your lifestyle expenses and more. Because of this, the loan amount that you are pre-qualified and pre-approved for should be viewed as an upper threshold. Analyze your personal budget to determine a housing expense figure that you are comfortable with.
The mortgage pre-qualification process only takes a few minutes in most cases, but you may want to get pre-qualified with several lenders or banks to identify the most competitive terms available to you. Now is the perfect time to take the next step forward with your purchase plans.