Before a prospective home buyer sets out to find that perfect home, it’s important for them to know how much they can afford and what other financing limitations may be. That’s when obtaining a Mortgage Prequalification is most beneficial. In fact, for many home buyers a Mortgage Prequalification or “PreQual” is the first step into the finance process.
What is a Mortgage PreQualification?
By definition, a mortgage prequalification is simply an estimate of the amount of money a financial institution will lend based upon the information the borrower provides to them. This should in no way be confused with a mortgage preapproval or a loan approval itself.
To get pre-qualified for a mortgage, an applicant simple needs to contact a lender and give them some information about their circumstances. Usually the lender will ask the applicant to provide some specific information about their income, employment history, credit rating, credit history and payment history. While different banks may require various information for prequalification, the general requirements for mortgage approval from bank to bank are remarkably similar.
How does a Prequalification Work?
For a lender to issue a prequalification, the borrower must first provide them with the information they request. The exact guidelines for pre qualification and pre approval vary from lender to lender and will also depend on the mortgage programs that are available to them. Generally speaking, a borrower may get pre qualified based upon three factors:
- Income: The maximum loan amount a borrower can prequalify for is determined according to the standard debt-to-income ratios for the mortgage program to be used.
- Credit: The borrowers credit report and payment history may be reviewed to determine if they are eligible for a mortgage. In general, borrowers are required to have at least a 620 middle FICO credit score with no late payments in the last year to be pre qualified.
- Employment: The borrowers employment situation for the last two years may be looked at for pre qualification. Gaps in employment could create an issue.
Once the home loan pre-qualification has been issued and the homebuyer locates the property they’re interested in purchasing, it’s helpful to be prepared in advance to provide whatever additional information and documentation the lender requests to get the loan approved. The loan application process today can be lengthy and tedious and smart buyers are prepared.
Standard documents that may be requested for a Mortgage PreQualification include:
- Pay stubs for the last month
- The last two years tax returns
- The borrower Social Security Number to check their tri-merge credit report.
One common misconception by home buyers today is that a pre qualification or pre approval means that they are actually approved for a home loan. To be clear, just because a borrower has a mortgage loan prequalification does not guarantee that they will be approved to for the mortgage. Rather, a pre-qualification for a mortgage gives the lender, the home buyer and the real estate agent a good idea of how much house the buyer can afford using on a basic inventory of the borrowers income, credit and employment situation.