With mortgage rates rising and median home prices continuing to climb prospective homebuyers are likely feeling a rising sense of urgency or even panic. But not every step of the home buying process needs to be intimidating. For instance, learning how to get prequalified for a home loan is a relatively informal process that can move you in the right direction towards homeownership.
Prequalification is more for people who are not yet sure if they are in the right financial situation for homeownership. The prequalification process checks on your creditworthiness to see what kind of mortgage you may qualify for. It’s also important to point out that prequalification cannot guarantee your approval for a loan. Think of it as an estimate.
If you are more confident in your financial standing, you may already be ready for a preapproval application. Where prequalification works to show your genuine intention to buy a home, a preapproval expresses your readiness.
How does prequalification help you?
While prequalification does not go through the formal and official checks that a preapproval goes through, having a prequalification letter from a lender goes a long way in showing sellers that you are serious about purchasing a home.
Even more important, the prequalification process lets you know how serious you can be about a home purchase. If you’re not yet where you need to be, the prequalification can serve as a guide to let you know what you need to do to get into the home you are longing for.
Our recommendations on how to get prequalified for a home loan
Getting a prequalification letter from a lender is surprisingly simple, but you can make it even easier by being prepared with what you need ahead of time. Your lender will be interested in the following:
While they will be looking for this information - and you should have it prepared - it doesn’t necessarily mean that you need to know your exact numbers or even prove these things. You will need proof and all your supporting documents when preapproval comes around. For now, the best estimate you can give is sufficient. Although, if you can provide the paperwork, you can have a more exact idea of what you can afford. You don’t want to get these numbers wrong because you will be given a completely inaccurate estimate in return.
How to get prequalified for a home loan: Getting your prequalification to work in your favor
To put yourself in the best position to prequalify for a home loan, know your information inside and out. Many people don’t know their real income-to-debt ratio, and ignoring information that is perfectly available to you will work more against you than for you.
Look at your pay stubs. Know exactly what your monthly income is and what portion of that income is already committed towards debts. Take stock of all the assets you own, their total value, and what amount of your assets you have in available cash that can go towards a down payment. Of course, you shouldn’t put everything you have available on your down payment. This process is one to show you what you’re ready for and let you know where you have more preparation to do.
Do you feel more confident about how to get prequalified for a home loan? What other tips would be helpful to you?
*This post has been updated from a version originally published in 2021.