Prequalification is a basic step in the mortgage process. It’s a simple initial requirement that people need to respect. Today we are going to find out more about it and how can you use it to your benefit.
Prequalification is the process through which a loan officer receives the information they need from a borrower. Following the information they get, they make a tentative assessment of how much the borrower can obtain from the lending institution. Usually, the details that need to be supplied are:
- Social security number;
- Proof of employment;
- Proof of assets.
This information is then compared to the monthly payments people already have on their current debts. This accounts for their credit worthiness. Next, the loan company uses a Debt-to-income ratio to calculate how much the person can receive.
The same process applies when it comes to a mortgage as well. It also offers an estimate of the borrowing power you have, and it relies on information offered verbally. The best thing about it is that it can be also done online, and most lenders charge nothing for it. Keep in mind that prequalification does not represent a preapproval, nor any type of commitment to lend. For these, you will need to provide extra information.
Prequalification vs Preapproval
Getting pre-approved is the next thing you need to do, and it involves more things. As opposed to the informal character of the prequalification, here you will need to complete an official mortgage application. Most of the time, you will also be required to pay an application fee. Next, you must supply the lender with all the necessary documents. Thus, they will be able to check your financial background extensively, as well as your current credit rating. As such, you will find out the mortgage amount you can receive approval on.
The preapproval represents a conditional commitment in writing for a certain loan amount. This lets you search for a home that fits your budget. Moreover, if you’re looking for a home, the potential seller knows you’re closer to getting the mortgage. After finding the right place for you, the pre-approval will turn into a complete application.
Here you have a short clip explaining in detail the differences between the two:
There are various benefits when it comes to prequalification. Here you can see a couple of benefits of this practice:
1. It Is Fast
Perhaps the main advantage of getting a prequalification is the fact that it takes little time. You just need to provide the officer with simple information, like we explained above. The process of completing a mortgage prequalification application is also simple, taking maximum 15 minutes. However, keep in mind that the entire loan application will require you around an hour, not to include the papers you need to provide besides it.
2. Loan Amount Limit
Another obvious advantage of getting a prequalification is the fact that you will know the maximum amount for which you qualify. This means that you can target precisely what houses you can afford and not waste your time on the ones you can’t buy.
3. Approximate Monthly Payment
Number three on our list of prequalification benefits is the approximate monthly payment. It can help you a lot if you know this piece of information. For starters, it is of great help when setting up your monthly budget. Moreover, you can assess your lifestyle and see what range of payment would suit you. The percentage of housing is also important. For example, the lender may say they’ll lend up to 50% of your own income per month, but you may only wish to give 43% for housing.
In general, lenders use the monthly payment you have on a property to assess your qualifications. The payment is made up of principal, interest, property taxes, as well as insurance – which is abbreviated as PITI. The income ratio that results relies on the housing cost alone.
5. Long-Term Debts
Lenders also need to consider the long-term debts a borrower has. They divide the total of the monthly expenses by the gross monthly income you have, which gives another ratio called overall ratio. Using the ratio above, together with this one, they can tell you what loan amount you can support.
6. Type of Loan
It may sound obvious, but not everybody knows that each different type of loan comes together with various benefits and issues. There is a huge list of types of loans that are available when you need a mortgage, so the prequalification allows you to be better informed about all of them.
7. Chances to Get a Loan
Sometimes, you need to decide fast if you want to get a certain loan or not. The prequalification helps you complete the loan process with enough time on your hands. The earlier you complete this process, the better. There are many cases where people lost the home they wanted to have because the seller couldn’t wait for them to get the loan. Moreover, you can save money if you choose a lender that has low fees but spends a lot of time on processing the loan.
8. Decide on the Mortgage
The last benefit, which might be obvious, is that the prequalification shows you if you can get a loan or not. There is also a good side here: if you see that you can’t qualify for a loan, you have enough time to fix this. You can’t completely trust the credit reports, for example, since they can show you some wrong information. At the same time, if there is a different problem there, you may need a couple of months to fix it.
To sum it up, a prequalification comes in handy whenever you want to get a mortgage loan. It is mainly used for this purpose, and you can also take advantage of the benefits we explained above. Basically, it saves you a lot of time and it can help you figure out what loan and what mortgages are best for you, depending on your income, lifestyle, etc.
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