When your search for a new home transitions from casually browsing through available listings on a local real estate agent’s website to actually reviewing and visiting open houses, it’s time to start thinking about getting preapproved for a mortgage. The prequalification process is really very simple, but most homeowners don’t realize just how vital this step can be in the process.
Is Prequalification the Same as Preapproval?
Mortgage prequalification is a process that gives you an estimate of approximately how much money you could borrow to purchase a home. This is a little different from a mortgage pre-approval, in that it does not generally involve an official loan application and will not be quite as exact, and it is not an indication that any specific lender has approved you for a specific loan—it is only an estimate based on the information you provide.
Benefits of Prequalification
If you walk into a store in the mall but you don’t bring your wallet, it’s going to be difficult for the salesperson to take seriously your intent to make a purchase. The same is true for homeowners who look at houses without prequalification. Since they have no idea exactly how much they might be able to borrow, these homeowners might be looking at houses that are way above (or below, although usually homeowners look at houses far above their price range) what they will be able to afford to buy.
Another benefit of this process is that you can avoid falling in love with a home that you will ultimately not be able to afford. If you are unaware that you will only likely be approved for a loan in the range of $250,000, you might begin your home search for $350,000 houses. Once you have these homes in mind, the houses available on the market that are actually in your price range might feel like a disappointment compared with what you initially saw.
It is also important to remember that prequalification is simply an estimate of how much you could likely get approved to borrow, which is not necessarily the same as the amount you would be comfortable taking on as mortgage debt, or the payment that you would be able to afford based on your net income and monthly expenses.
Spot Potential Credit Problems
The loan prequalification process also helps you spot financial areas that might become a problem for you when you do plan to apply for a loan, giving you time to sort them out prior to your loan application. This is critical in your quest to get approved for a loan, since even something that dings your credit score by 20 points could significantly impact your ultimate interest rate.