Prequalifying for a mortgage loan is an effortless process that gives you an estimate of what you can afford. This information helps you make better decisions when looking at homes and provides added peace of mind when making purchases.
By being prequalified, you have given a lender basic information about your income, debts and assets. They then use that data to calculate your debt-to-income ratio and estimate how much of a mortgage payment you can afford.
This process is typically quick and can be completed online or over the phone without any documentation or credit check. However, if your credit score is low or you don’t have a stable financial situation, it may take longer to get prequalified.
How to Acquire Home Loan Prequalification
The initial step in applying for a mortgage is finding a lender. Most banks and lending institutions have websites where you can complete an online form or call them directly with questions and details about your finances. After submitting the form, the lender will provide an estimated loan amount and approval date (which may differ depending on their policies).
You can use a mortgage calculator to estimate your loan amount and calculate monthly payments. These are available online or in newspapers near you.
Calculating your mortgage loan amount with a mortgage calculator is an efficient way to plan ahead before you start house hunting. Additionally, it shows how much money can be saved by making larger down payments or paying off debts.
Your mortgage lender will assess your income, debts and credit when calculating how much mortgage you can afford. Generally speaking, they require that you spend no more than 28% of pretax income on housing expenses and 36% on all other debts such as credit cards, car loans or student loans.
A lender may also require that you have a satisfactory credit score. A low score could prevent you from qualifying for the most advantageous interest rate on your mortgage loan.
Once you’ve secured a lender, it’s time to decide if you want to get prequalified or preapproved for your mortgage. Both of these steps can be beneficial when purchasing a home; however, their purposes differ and necessitate different amounts of paperwork.
Selecting Between Prequalification and Preapproval
Prequalification has historically meant something more substantial than preapproval, offering you a guarantee that you will be approved for the loan you request. While it does not ensure approval, having prequalification can give you an edge over other buyers when making an offer on a home.
Though no single rule applies, most lenders require specific documents in order to assess your debt-to-income ratio and other credit related indicators. This may include reviewing debts, tax returns and other financial data.
In addition to reviewing your debt-to-income ratio, your lender will also take into account other credit and financial indicators like employment history and savings habits. If these elements aren’t in good shape, they are likely to decline the loan application.