With a little preparation, this quick and easy process can set you on the house-hunting journey.
When you're at the beginning of your home-buying journey, a pre-qualification with your mortgage lender is a smart first move that can help you get started and begin to formulate your budget.
With pre-qualification, you are providing your lender with basic information to get an estimate of the amount of money you will likely be allowed to borrow.
The benefit of a pre-qualification is that you can receive a letter with an estimated loan amount very quickly, without a deeper dive into financial documentation. This quick estimate from a qualified lender can help you begin to focus your home search and outline a budget based on what you can afford to borrow. It's also an asset to have if you are inspired to make an offer, and sends a message to the seller that you know what you can realistically afford and are a qualified buyer.
However, pre-qualification is an estimate of what you can afford, not a guarantee. A pre-approval letter carries more weight, guarantees the terms and rates of your loan, and requires more financial details and documentation.
That said, a pre-qualification is an easy and excellent way to begin your house hunting journey. Here's what you'll need to prepare:
How much do you expect to make each month? Share with your lender any income you receive or anticipate receiving annually, including salary or weekly pay information as well as any side businesses or income-generating assets. This will help your lender calculate what you can afford as a monthly payment.
You'll want to have an idea of how much you owe on a car or student loan, as well as any credit card balances so you can share that information with your lender. They'll use it to calculate your debt-to-income ratio, which helps them determine how much of a home loan payment you can carry and what mortgage rates you may qualify for.
Your lender will most likely check your FICO credit scores with the three major credit reporting bureaus: Experian, Equifax, and TransUnion. This will let them know how much debt you have, if you pay your bills on time, and other financial information and behaviors that indicate you're a good candidate for a loan and likely to pay your mortgage in a timely manner.
Important note: Because this type of credit check is simply to create an estimate, it's called a "soft pull" and does not impact your overall credit score.
Down payment amount.
Have an idea of how much money you are willing and able to put down on your home and to cover any closing costs. This contributes to the overall price of what you can afford, and can also impact the terms of your mortgage, such as interest rates. The higher the down payment, the lower your rates may be. Higher down payments can also waive things like a bank's requirement for private mortgage insurance (or PMI).
With just a few pieces of self-reported information and a credit check, you can have a pre-qualification letter in hand that will help you get ready to connect with a realtor, start formulating a budget and start looking for the home of your dreams.