You’ve likely encountered ads or billboards urging you to “Get prequalified for a mortgage now!” Mortgage prequalification can be a useful tool for understanding your homebuying budget by providing a general idea of your borrowing capacity. However, it’s important to note that this is merely an estimate and may not be sufficient for making a formal offer on a home.

Here’s what you need to know about mortgage prequalification, including what it entails, how to obtain it, and how it differs from mortgage preapproval.

What is mortgage prequalification?

Mortgage prequalification indicates that a lender has assessed your basic financial information to estimate how much you can afford to borrow for a home. It provides a preliminary idea of your potential loan amount, but it is not a loan commitment or a guaranteed figure. Additionally, it does not constitute an official application; you will apply for the actual mortgage only after a seller accepts your offer on a property.

How to prequalify for a mortgage

Most prospective homebuyers initiate the mortgage prequalification process online or over the phone. To prequalify, you’ll need to share information with the lender about:

  • Your income
  • Your employment status
  • Your monthly debts and obligations
  • Your financial assets, including savings, checking, retirement, and investment accounts
  • Your Social Security number
  • Your planned down payment
  • Any history of bankruptcies

“Prequalification is an important early step in securing financing,” says Will Reynolds, a Nashville-based real estate agent. “While it doesn’t guarantee a loan, it’s a crucial part of the process.”

The prequalification process is typically quick; the lender will evaluate your information and may perform a soft credit check. You should receive a response within minutes.

Why get prequalified?

Getting prequalified offers several advantages. First, it helps you establish a rough homebuying budget by giving you an idea of how much you can finance. This can guide your search, ensuring you focus on homes within your price range.

Additionally, a mortgage prequalification can reveal if your credit or finances need improvement. This way, when you’re ready to apply for a loan, you may qualify for a larger amount or a better interest rate.

Prequalification can also streamline the loan process. While you’ll still need to apply and submit paperwork later, you’ll have a better understanding of the information the lender requires, allowing you to prepare your documents in advance.

However, while many homebuyers find prequalification beneficial, it’s not always necessary. If you already have a clear sense of your budget, have compared lenders, and have your finances organized, you might choose to skip prequalification and go directly for preapproval.

Mortgage prequalification vs. preapproval

While prequalification and preapproval may sound similar and are sometimes used interchangeably, they are distinct processes.

With a home loan prequalification, lenders rely on your self-reported financial information without requiring documented proof. This gives you a general idea of what you might afford, but it doesn’t guarantee that you’ll receive a loan of that size or any loan at all.

On the other hand, preapproval involves a more formal commitment from the lender. It signifies an agreement in principle to extend a specific amount of financing, often accompanied by an estimated interest rate.

Here are some key differences between preapprovals and prequalifications:

Mortgage prequalification

  • What to Submit: Information about your income, desired loan amount, and down payment.
  • Credit Check: Typically involves a soft credit inquiry.
  • Time Required: Usually takes just a few minutes.
  • Importance: Helps you estimate your potential homebuying budget.

Mortgage preapproval

  • What to Submit: Documents verifying your income, debts, bank accounts, and tax returns.
  • Credit Check: The lender will perform a hard inquiry on your credit history/score.
  • Time Required: It can take up to 10 days, though many online lenders provide preapprovals in just a few minutes.
  • Importance: A preapproval shows you’re a serious buyer with financing secured. It carries more weight than a prequalification and can strengthen your offer, as some sellers require a preapproval letter with bids.

In contrast, prequalification is ideal for those just starting out. It helps you understand your price range for house-hunting, but it doesn’t offer the same credibility to sellers since it doesn’t guarantee you have the financial backing to purchase a home.