Prequalification occurs when a lender estimates what size loan, usually a mortgage, you can afford. A prequalification estimate is non-binding, unlike pre-approval, which is an actual agreement to make the loan.
Prequalification for a mortgage loan is a smart step to take even before you go house hunting.
Why? Prequalification is simple, quick, and gives you an estimate of how much you can afford to spend on a house. Plus, it’s non-binding and is usually free, so if you decide the time isn’t right to buy a house, you’re not out any money.
Many people consider prequalification the first step in the home-buying process. You supply the lender with some basic information about your income, debts and assets. Using that information, the lender runs a credit check and gets an idea of how large a loan they might be able to make you. If you decide to move forward, the actual amount might be higher or lower, depending on additional information you provide later in the process.
Prequalification is also the first step in establishing a relationship with, and seeing how comfortable you are with, a particular lender. You can discuss your mortgage goals and needs with the lender, and they can talk to you about different mortgage options and what might work best for you.
With a prequalification in hand, you also can save time and frustration by narrowing your house-hunting to properties you are sure you can afford. Remember, though, that the prequalification is non-binding, and that also means you are not locked in on an interest rate if rates go up before you obtain the loan.
If you decide to move ahead, the next step after prequalification is pre-approval. You provide the lender more detailed financial information, and the lender officially approves you for a loan up to a set maximum. You may be required to pay a fee, but then a pre-approval letter can give you more negotiating power when making an offer on a home.
