What Does Prequalification Mean?
Getting prequalified for a mortgage means that a lender has reviewed your financial picture and believes that you are a good candidate for a loan. Though this is not a guarantee that you will be given a mortgage loan, it provides a good indication that you are in the financial position to buy a particular property.
Mortgage prequalification is not a terribly complicated process and can help expedite matters when you find the home of your dreams.
Video: Pre-Approval vs Pre-Qualification Letter
How Do I Get Prequalified for a Mortgage?
Once you've decided to get prequalified, it's time to find a lender or mortgage
broker to run the numbers. It's always helpful to get a referral from a friend
or family member. The Internet is also a good source of independent opinions on
a wide variety of mortgage professionals.
Once you've selected a lender or mortgage broker, you must provide him or her your gross monthly income and total monthly payments such as credit cards or child support. From there, you or your lender will calculate your debt-to-income ratio by adding up your debts and comparing that to your income. Lower ratios are considered good.
You will then authorize your lender or broker to run your credit report, which will include a credit score. A score above 700 will get the best interest rates, while a score under 620 is considered subprime and is subject to higher rates and less favorable terms. The lender or broker will then prepare a letter of prequalification for you. This states that he or she has reviewed your information and you appear to be a good credit risk. Remember that prequalification does not guarantee you a loan. Letters are typically valid for 30 days.
Should I Get Pre-qualified?
Prequalification helps you prepare for the process of financing your new home. When you get prequalified, you'll understand exactly how much you'll be able to afford – and you'll go into the purchasing process with your eyes open.
Video: FHA pre-qualification
In addition, many buyer's real estate agents will request that you get pre-approved before beginning to search for a home. However, if you're working with a seller's agent, you may think twice before divulging your maximum budget since that could hurt you in the negotiation process.
As with any other financial decision, prequalification is ultimately up to you
and may or may not meet your individual needs. However, it can be an extremely
helpful option that not only lets you know exactly how much you'll be able to
spend, but can speed up the lending process once you're ready to finance your
new home since you have documentation stating that you are a good credit risk.
Talk to your real estate agent or attorney before making any final decisions
about prequalification.