Anyone who has ever undertaken the home-buying process understands the value of mortgage prequalification. The process of mortgage prequalification involves supplying a lender with information concerning the applicant's employment, debts, other income and assets. From this information, mortgage lenders can calculate the maximum mortgage amount for which the consumer would qualify.
Advantages of Prequalification
Getting in touch with a lender to prequalify for a mortgage is beneficial on several levels.
Being prequalified helps homebuyers, who might be overwhelmed by the process and the sheer number of opportunities that surround them, narrow the range of homes that they should be considering. In other words, knowing one's price range going in saves prospective buyers valuable time and effort because they can focus on houses they know they can afford.
Mortgage prequalification also sends an important message to sellers. The person who is prequalified is considered a serious shopper by those selling their homes. Offers from someone whose potential loan has been prequalified by a lender are taken more seriously, and definitely set the dedicated homebuyer apart from mere "lookie-loos." Also, prequalification can give one an edge when competing with others to purchase a "hot" property.
First Things First
It's a good idea for buyers to get prequalified for a mortgage before shopping for a home. The process takes relatively little time and costs little or nothing. The initial prequalification stage also allows potential borrowers to discuss with a lender any goals or needs they may have regarding their mortgage. The lender can then explain mortgage options and recommend the type that might be best suited to the borrower's particular requirements.
Mortgage Prequalification versus Mortgage Preapproval
While many real estate agents and their clients use the terms prequalification and preapproval interchangeably, they are very different in practice. Prequalification involves providing information to the lender and in return getting a letter stating the maximum loan amount that the home buyer *should* be able to afford. On the other hand, preapproval involves providing documentation to support that information, as well as passing a credit check.
Home buyers complete an entire application package, supplying pay stubs and / or tax returns, bank and investment account statements, and perhaps other paperwork like divorce decrees, business licenses, canceled checks and more. The whole thing is actually processed and underwritten, and if approved, the borrower should be able to purchase any property that meets the lender's requirements.
The road from mortgage application to mortgage approval can be blocked by many unexpected problems, from errors on the credit report to questions about that second job or a bounced check showing up on a bank statement. Going through the preapproval process allows mortgage applicants to resolve these issues without the added pressure of being in escrow with a closing date hanging over their heads.