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Advantages and disadvantages of mortgage prequalification

Buying a home can be a long process, but one way to speed up the mortgage part is to get prequalified. A mortgage prequalification is one step away from prior approval, but has its advantages. Here’s what prequalification is and why you might want to be prequalified for a mortgage.

a large lawn in front of a house: A single-family house with a bungalow-style entrance

© Imagenet / Shutterstock
A single-family house with a bungalow-style entrance

What is mortgage prequalification?

A mortgage prequalification is an estimate of how much a borrower can be approved based on their income and other basic factors. The screening process is simpler than the pre-approval process, and can usually be done through a phone call or an online form that provides financial information to a lender.


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Benefits of mortgage prequalification

You will have an idea of ​​your budget

One of the advantages of going through the screening process is that you will get a general idea of what you can afford before shopping for a home, says Mac Cregger, senior vice president and regional manager of Angel Oak Home Loans in Atlanta.

You will avoid sticker shock by going through this process early, especially if you are buying your first home.

“Sometimes buyers may have an unrealistic view of payments on a particular home because of the way certain mortgage payment information may appear online,” says Craig Garcia, president of Capital Partners Mortgage in Coral Springs, Florida. “Having a solid understanding of what a realistic payment on a home is can help buyers focus on properties that realistically meet their wants or budget constraints.”

Potentially, you’ll also know where you stand with closing costs, says Abel Carrasco, loan originator with Homeowners Financial Group in St. Petersburg, Florida.

“Understanding how much money you’ll need to bring towards the close, including the down payment and closing costs, will help you better manage your expenses and chart a course to help you reach your homeownership goal.” , explains Carrasco.

You could be in a stronger position

Prequalification can put you in a “better negotiating position with the seller,” notes Peter Boomer, director of mortgages at PNC Bank – although nowadays pre-approval carries a lot more weight.

Still, being prequalified can help the salesperson know that “you’re serious,” Carrasco says.

“It’s not uncommon in this market for sellers and their real estate agents to insist on seeing a prequalification letter before even letting you see the house,” Carrasco said. “In a hot market, sellers don’t bother wasting their time preparing their home for an exhibition and only leave to have a ‘kicker tire’ traips through their home without the means or intention to purchase it. . “

You can find out more about your options

While prequalification is not a formal process like pre-approval, it gives a borrower the ability to provide information to a lender about their income, assets and liabilities, Cregger explains.

Now that the lender has this information, you can learn about the different types of mortgages that would be right for you, and potentially everything. home ownership programs or the help you are entitled to.

“Maybe you are able to buy with less down payment than you thought or maybe your credit is in better shape than you thought,” Garcia says. “Understanding your options helps you make better decisions when it comes to choosing a home. “

Disadvantages of mortgage prequalification

It can affect your credit score

If you are prequalified multiple times over a long period, such as once in January and again in June, your credit score will be affected. This is not ideal, as you are looking to apply for a loan with the most favorable rate and terms.

However, if you apply for mortgage prequalification over a shorter period of time, they will have little effect on your score. This is because credit scoring models consolidate inquiries over a shorter period, typically 30 days, into one request on your credit report. This means that you should do all of your shopping in a short period of time, if you can.

“It is your right as a consumer to be able to shop among lenders to make sure you get competitive quotes,” Carrasco says.

Once a lender withdraws your credit, that same report will be used for underwriting if you submit a full mortgage application – and the lender doesn’t have to withdraw it again, as the report is valid for 120 days, adds. Carrasco.

Nothing is guaranteed

The mortgage industry doesn’t have a set standard on what exactly constitutes prequalification or pre-approval, Garcia says.

Most mortgage lenders view a prequalification as a preliminary overview of a borrower’s needs and qualifications, designed to give the borrower an understanding of what may be possible. In other words, prequalification does not mean that you are guaranteed to get a loan. In fact, if the prequalification process isn’t as complex as pre-approval or doesn’t go into the details of your financial situation, you can still get turned down. In this way, prequalification can give a false sense of security.

Next steps

If you’ve been pre-qualified and you’ve narrowed down your home search, it’s time to get pre-approved.

In the pre-approval process, the lender examines your credit report and financial situation and approves you for a specific mortgage amount. This requires submitting more detailed information, including documents on employment, car and student loans, total savings, and other debts such as credit cards.

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