Homebuyers

Thinking of Buying a Home? You May Want to Start with a Mortgage Pre-Qualification

There’s a fine line between idly scrolling through real estate listings and beginning the process of purchasing a home. It’s a line with a name: mortgage pre-qualification.

Pre-qualification is a process in which a loan officer looks at some of your information (your income, financial assets and does a soft credit check) to figure out if you’re likely to be approved for a mortgage and provides an estimate of how much you may be able to borrow.

“Basically, a loan officer vets the borrower,” said New American Funding Regional Manager Dominick Moncada. He is based in Staten Island, N.Y.

It’s a way to set realistic expectations on all sides before you’ve ever set foot in a listed home.

However, pre-qualifications do not carry as much weight with sellers as a mortgage pre-approval, particularly in a competitive market. A pre-approval is when a lender takes a deeper look at your finances and then lets you know how large of a mortgage you may be eligible to receive.

Those looking into getting pre-qualified for a mortgage are likely just getting started in their hunt for a home. That’s why we’ve provided a step-by-step walkthrough of what you need to know before setting off on your homebuying journey.

What is a mortgage pre-qualification (and why you want one ASAP)?

Many aspiring buyers begin the process with a homebuying assessment. You meet with a loan officer to go over their finances, which includes their incomes, savings, credit scores, and debts. Then you make a plan together that will help you get ready for a mortgage pre-qualification.   

A mortgage pre-qualification is essentially the educated guess of a loan officer about how much you could reasonably afford given your current expenses, income, and creditworthiness.

This estimate is made after looking at your assets, your income, and a surface-level check of your credit history. This is not a guarantee, as the loan information did not go through the underwriting process.

“A buyer would want to get a mortgage pre-qualification to determine how much they would qualify for,” said New American Funding loan officer Armine Arutunian. She is based in Brea, Calif. “That’s the first step in purchasing a home.”

Those who are getting serious about buying a home should seek a pre-qualification, avoiding an embarrassing situation where you might be caught flat-footed while touring a home you love. You want to know that you will likely be able to afford it, so you can put in an offer.

“You have to be ready with it,” said Moncada. “The last thing that you want to do is be at a home and you can’t get your loan officer on the phone for a while.”

What are the advantages of a mortgage pre-qualification?

A mortgage pre-qualification solidifies the idea of buying a home into something more real for both buyer and seller. It sets the bar for what a mortgage lender might provide and telegraphs to sellers that you aren’t just daydreaming.

This is useful in narrowing down your search from the beginning to only include properties you could theoretically afford.

However, in more competitive markets, sellers may require mortgage pre-approvals before allowing buyers in for a showing or even an open house.

“You really will not be able to make an offer on a home without a pre-qualification at a minimum,” Moncada said. 

What are the disadvantages of a mortgage pre-qualification?

There are drawbacks to walking into a home showing with just a pre-qualification.

It’s not a guarantee that you will be approved for a loan or that you can qualify for the amount you need to purchase a home.

Sellers and their agents know this. That’s why your offer may not be as competitive as another buyer with a mortgage pre-approval offering the same amount.

“Most realtors see the word pre–qualification and they get put to the bottom of the list,” Moncada said.

What is required for a mortgage prequalification?

Mortgage pre-qualifications require very little from a prospective homebuyer. A loan officer will ask for your income information, any assets you hold in your bank accounts, the size of your potential home payment, and how much you hope to pay each month on your mortgage.

They will also do a soft credit pull, which shouldn’t lower your credit. Then they will calculate the maximum purchase price for your new home.

“We want to ensure that [buyer] can afford [the monthly mortgage payments] for the next 30 years,” Arutunian said.

It’s crucial that you not hide any potential hindrances from the loan officer. You don’t want to end up with an unrealistic pre-qualification that doesn’t match a real, underwritten offer once a more in-depth examination of your finances is complete.

“Provide the loan officer with all the requested documents without resistance,” Moncada said. “It’s imperative to be transparent about anything that could potentially impact the transaction.”

How do pre-qualifications differ from mortgage pre-approvals? 

A pre-approval is a step beyond a pre-qualification. It’s a dollar amount that has been approved by a loan underwriter after confirming your income information via tax documents, your assets via bank documents, and your employment via paystubs.

It signals that you are likely to qualify for a mortgage up to a certain amount.  

“[A pre-qualification is] an educated guess about whether the borrower qualifies or not,” Moncada said. “[A pre-approval] has been reviewed by an underwriter. It will hold a lot more weight when you present that to a seller.”

Dominick Moncada NMLS# 292534

Armine Arutunian NMLS# 251075