What Does Mortgage Prequalification Mean to Me, as a Borrower?
If you've been researching the home buying process for any length of time, you've probably encountered the terms pre-qualify and prequalification. These terms are often used in relation to mortgage loans. For instance, a lender's website might invite you to "Click here to pre-qualify for a home loan." They'll explain how easy the process is, and that it only takes minutes. This is usually followed by a web-based form that requests information about you.
But what is mortgage prequalification exactly, and how does it help you when buying a home? What are the steps involved in the process? And is it even worth the time? These are some of the questions we will address in this mortgage tutorial.
What It Means to Pre-Qualify for a Home Loan
When you pre-qualify for a home loan, the lender will review your income to give you a general idea how much you are able to borrow. But "general" is the key word here. Mortgage prequalification is not a commitment to lend. Nor does it guarantee you will actually receive that amount from the lender. It's just a way to get the ball rolling -- a way to open up the dialogue between you and the mortgage lender.
In most cases, prequalification paves the way to the next step in the process, which is pre-approval. The difference between these two terms has to do with the level of scrutiny involved:
- Mortgage Prequalification is when the bank / lender performs a very basic review of your financial situation, in order to tell you how much of a home loan you can get. You can think of it as a free consultation between you and the loan officer.
- Mortgage Pre-approval is a more in-depth version of this process. Here, the lender actually verifies your income, your debt level, and other aspects of your financial situation. They'll also check your credit score to see where you stand in that department. They do this to determine two things: (1) whether or not you are qualified for a home loan, and (2) how much of a loan they are willing to give you. Learn more
So when you pre-qualify for a mortgage, you are only getting a rough idea of what you can borrow. The lender is only taking a cursory look at your financial picture. It opens the dialogue and gets the ball rolling. But it doesn't mean much beyond that. Prequalification for a home loan is not a commitment to lend, nor should it be viewed as such. It is the first in a long series of steps leading to your final approval (or rejection).
How the Mortgage Prequalification Process Works
So how do you pre-qualify for a home loan? What does the prequalification process involve? You might be surprised by the simplicity of it all. Basically, you just give the lender your name, phone number, and some basic information about your financing plans. After that, they will contact you for more information, such as your income and debt situation. Based on all of this, the lender will give you a general idea of how much you can borrow. Or they'll tell you that a home loan is beyond your reach right now. Either way, you have moved the process forward.
Expecting something more complicated? It's actually very simple. The reason it's so simple is that it's only a cursory review process that does not result in a commitment to lend. Cursory and noncommittal -- keep those two terms in mind as you get into the prequalification process.
How basic is it? Here's the information you would need to provide in order to pre-qualify for a home loan online, with two of the largest mortgage lenders in the United States:
- First and last name
- Phone number
- Email address
- Zip code where you currently live
- How soon you'll be applying for a loan
- Whether or not you are currently working with a real estate agent
- How you would like to be contacted (phone vs. email, etc.)
Under the form where you would enter this information, it explains that a Wells Fargo representative will contact you within two business days to provide a " no-obligation prequalification consultation." This is when they'll give you an estimate of how much you might be able to borrow. If you choose to move forward with the process, the loan officer will eventually ask you for some additional documents -- pay stubs, bank statements, tax records and the like.
- The purpose of the loan (e.g., purchase vs. refinance)
- The amount you want to borrow
- How you plan to use the home (primary residence, income property, etc.)
- The type of property you are buying (detached home, multifamily, condo, etc.)
Other banks ask for similar information during the prequalification process. For the most part, it's a pretty standard process across the board. This is generally all it takes to pre-qualify for a loan. As you can see, you'll only need to provide some basic information to complete the online prequalification form. After that, a loan officer would contact you by phone or email to go over your request.
The thing you need to keep in mind is that there is no guarantee you'll even qualify for the loan. Mortgage prequalification and final approval are miles apart, in terms of documentation and scrutiny. Before you can get your final approval, an underwriter will put all of your financial documents under the microscope. The underwriter is like a financial detective who examines your application package to make sure it meets the lender's guidelines for approval (as well as the guidelines established by Freddie Mac and/or Fannie Mae).
Why Pre-Approval is Better
This brings us to another common question among first-time home buyers. Do I even need to pre-qualify for a home loan, before shopping for a house?
To be honest, a seller probably won't care that you've been pre-qualified. As homeowners, they are likely familiar with what it takes to get a mortgage loan. And if they're not familiar with it, their real estate agents will fill them in. Their agents will explain that a mortgage prequalification doesn't guarantee financing, and that it's based on a quick review of the borrower's finances.
Sellers are very concerned about such matters, and with good reason. Sometimes a buyer's financing will fall through at the last minute. Unfortunately, it's a common occurrence in the current economy. That's the last thing a seller wants. So they'll want to see more from a potential buyer. They'll want you to be pre-approved by a mortgage lender, not just pre-qualified.
Industry 'Secret': Mortgage Prequalification is Lead Generation
Mortgage prequalification is used as a lead-generation tool by lenders. It helps the lender generate website leads from potential customers. They offer something of value to you -- the chance to find out how much you can borrow. They capture your contact information. And then they follow up with you regarding your request.
When you pre-qualify for a home loan online, you are basically submitting a glorified contact form. In fact, the prequalification process doesn't really start until the loan officer finds out how much money you earn, and what your debt picture looks like. So don't expect to receive a yes-or-no answer, or even a dollar amount, via the Internet.
In a sense, the prequalification is useless to you as a borrower. It's not a commitment to lend. It doesn't help you negotiate with sellers, the way a pre-approval letter does. It doesn't even give you a realistic sense of what you can borrow, because the lender only performs a cursory review of your finances. Personally, I recommend you skip it and go straight to the pre-approval. But it does give you an easy way to get things moving with the lender. So it offers some value in that regard.
I hope you have found this information useful, and I wish you all the best in your home buying process. If you would like to learn more about this topic, use the search box located at the top of this website. We have dozens of mortgage-related tutorials on the site. So you're bound to find some helpful material.
Disclaimers: This article explains how to pre-qualify for a home loan. This article is provided for educational purposes only and does not constitute personal financial advice. Mortgage prequalification varies from one lender to the next. While the process itself is generally the same, you may encounter differences with the type of information that is requested. Thus, the details provided in this article may not apply to all lenders and lending scenarios.
Where to Go Next
You can start the pre-approval process right now. It's the only way to find out if you're qualified for a mortgage.