Do you wonder how much mortgage you can afford? If you are in the preliminary stages of thinking of becoming a homeowner, you may want to get prequalified for a mortgage.
A pre-qualification differs from a pre-approval. The prequalification is an estimate of what you can afford based on the information that you provide. A pre-approval is a more solid approval because the lender evaluates your income, asset, and credit documents to determine what you can afford.
Do you need to go through the hassle of applying with a lender in person? Can you just get prequalified online?
Find a Prequalification Calculator
Before you apply with a lender, you may want to use a prequalification calculator to help you decide what you can afford. While they aren’t anything formal, it will give you a good idea of what to expect. The programs typically ask basic questions including:
- Your annual income
- Your credit score range
- Your desired mortgage term
- The estimated rate
- The approximate amount of real estate taxes and homeowner’s insurance
- Basic questions about your credit, income, and financial history
The calculator will then give you an estimate of what you can afford. It will break down the total amount of loan that you can obtain and its monthly payment.
Finding a Lender
Once you know that you are ready to get prequalified for a loan, it’s time to find a lender. Luckily, the internet makes it very simple. You can search for online lenders and find the lender(s) that meet your needs. Make sure you read about the loan programs that they have available as well as their procedures for online approval.
We recommend that you obtain a pre-approval from a couple of lenders. This way you can compare the offers. Are they for a similar loan amount? Are the terms similar? If they are very different, you may want to obtain a few more prequalifications so that you can see what the ‘norm’ would be for your situation.
The good news is that when you apply for a prequalification, lenders don’t pull your credit. They use the information that you provide, including an estimate of your credit score. This means that you can apply with multiple lenders and not worry about ruining your credit score.
What’s the Difference in a Pre-Approval?
We want to caution you on the difference between a prequalification and a pre-approval – they are two different things. Oftentimes people confuse them only to find out that they obtained the wrong approval.
A pre-approval occurs when you formally apply for a loan with a lender. You complete a loan application and provide the lender with your:
- Pay stubs
- Tax returns
- Asset statements
- Personal identifying information
- Employment information
- Credit scores
The lender then evaluates all of these documents, including your credit report to create the pre-approval. The pre-approval has a little more weight than the prequalification. With a pre-approval, you basically have a ‘conditional approval.’ It means that the lender is willing to give you a loan if you can meet the conditions within the letter. Those conditions usually pertain to the property you purchase as well as a final verification of your income, assets, credit, and employment.
You may still find lenders that offer an online pre-approval, just be careful where you apply. With a pre-approval, the lender pulls your credit. Now credit bureaus do allow you to apply with multiple lenders within a 2 to 3-week period. This gives you the chance to find the loan with the best terms. The credit bureaus will only hit you for one inquiry on your credit report if you shop around within the allotted time.
The pre-approval is what you need if you are ready to shop fora home. Sellers and real estate agents won’t take the prequalification seriously. The prequalification is good for those times when you are just starting out in the process and still trying to figure out what you can afford and/or what you want to buy.
Before you apply for a prequalification online, make sure you figure out if you really need just a prequalification or if you need a pre-approval. Both the pre-approval and prequalification typically last for 60-90 days, if you don’t do anything with it in that time, you’ll likely have to apply again.