A prequalification is the first step that one must take when starting the homebuying process. A prequalification is a non-binding process in which the buyer provides basic financial information to potential lenders on their income, debt, and credit to determine if they are a good fit for that lending institution to be able to provide them a mortgage to purchase a home.
Upon reviewing the information provided, the lender then communicates details to the prospective buyer about how much they are qualified for. This information will help the buyer determine the size and price point they can purchase based on their current financial situation.
How do I get pre-qualified for a home loan?
The lender will require some basic information from you as a prospective buyer before they will pre-qualify you for a loan to purchase a home. Although some of the documentation may not be required until after you've started the loan, the following are some of the pieces of information that you will have to provide your lender in order to get prequalified for a loan:
- Proof Of Your Income: You will have to send the lender some sort of proof of your income such as W-2 statements from the previous two years, recent pay stubs for year-to-date income, and proof of any additional income such as alimony or bonuses from the past two years of your tax returns. The days of "no documentation" loans are in the past.
- Proof Of Assets: Any assets that you have such as savings accounts, bonds, stocks, or investments that you may have. Also, if your initial funds are limited, consider an FHA loan which only requires 3.5% down versus the typical 10-20% that most other loans required. Remember, if you are getting money from a friend or family member for helping with the initial costs you will need a gift letter to prove who the funds are from and what they are intended to cover.
- Good Credit: Most lenders today will only give the lowest interest rates to those potential clients with the best credit ratings. The better your credit rating the lower the interest rates you will likely have to pay. Borrowers with credit scores below 580 are usually required to make a bigger down payment and only those with 620 scores and up will qualify for an FHA loan.
- Employment Verification: Your lender will not only want to verify your pay stubs they will also likely want to call your employer to ensure you are employed there and are receiving a reliable, steady stream of income so you can afford to pay your mortgage back each month.
- Documentation: You will have to prove your identity with copy of your driver's license and may need to provide your social security number and signature allowing the lender to pull your credit report. You may have to provide additional paperwork throughout the rest of the process as requested by the lender.
How long does it take to get prequalified?
The general prequalification process can be quick depending on how fast documentation is provided, but could take longer to complete if there are items that need additional clarification. On the prequalification letter, you will receive the loan amount which you will qualify for (which will allow you to begin looking for a home in that price range) with the confidence that you can get a loan when you find the one you choose.
Being prequalified allows you to make offers quickly before someone else makes an offer that the seller accepts. This can help increase your chances of getting the home that you fall in love with when you see it.
Prequalification for a home will give you an actual targeted range in which you can purchase a home. That way when you find the home you would like to buy you will be able to simply bid on the home and send the information to the lending company for them to approve. This increases your chances of getting your dream home if multiple buyers are bidding on the same property.
Prequalification for a mortgage also ensures that you will be able to get a loan for the full amount and gives you confidence when you start your home buying process.