Mortgage prequalification: Benefits and how-to guide
This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer mortgage prequalification. Any information described in this article may vary by lender.
Quick insights
- Mortgage prequalification is an initial assessment of your financial situation based on the information provide to the lender. Preapproval is a more rigorous verification process that involves a hard pull and in depth assessment of your financial history.
- Mortgage prequalification usually serves as an initial step in the mortgage application process, providing insight and guidance as you move forward with your financial goals of owning a home.
- It is recommended to gather essential documents such as pay stubs, tax returns and other pertinent financial statements.
You’ve decided to buy a home and now you’re looking for a mortgage to help make it happen. But how much do you need to borrow? How much can you borrow? Mortgage prequalification can help you better understand your options to make more informed decisions. To give you a better understanding of the process, let's explore how mortgage prequalification works and how to get started. Please note that Chase does not offer mortgage prequalification, only mortgage preapproval for prospective homebuyers.ec-mortgage-prequalification This article is for educational purposes.
What is mortgage prequalification?
Mortgage prequalification is an early step in the homebuying process when a lender evaluates your financial situation to estimate how much you may be able to borrow. This generally involves reviewing key financial information, such as your income, assets and debts. Your mortgage prequalification may be useful in guiding your search by providing a general estimate of what you can afford.
Mortgage preapproval vs. prequalification
Preapproval is a more detailed examination of your complete financial background, including a thorough check of your credit report, proof of income and assets. Typically, the terms of your preapproval will closely resemble your final loan offer, though the final terms of your official offer may still be subject to change. Some might think of prequalification as a way to gauge your potential borrowing capacity and preapproval as a step towards securing a mortgage. Prequalification, on the other hand, is usually a quicker assessment of your financial situation based on information you provide.
Benefits of getting prequalified for a mortgage
Mortgage prequalification can help homebuyers in a few ways:
- Simpler homebuying process: When you prequalify for a home loan, it helps identify what you can afford. This may help narrow your search down to more suitable properties early.
- Clarifies your options: Mortgage prequalification may highlight any potential financial constraints you might face, such as high debt-to-income (DTI) ratio. This could provide early insight into your budgeting as a prospective homeowner and help you make more informed decisions.
- Improves negotiating power: Getting prequalified for a home loan may also provide a competitive edge in the homebuying market. Mortgage prequalification signals an active intent to purchase, and lets sellers know you’ve been deemed likely capable of borrowing a specific loan amount.
Key factors in home loan prequalification
Before you prequalify for a mortgage, let’s look at some of the major factors lenders may consider when evaluating your financial situation.
Credit score
For one, lenders will typically weigh your credit score. Higher scores tend to represent higher creditworthiness, demonstrating a positive track record of timely debt repayments to lenders. Before mortgage prequalification, it might be worth reviewing your credit rating ahead of time.
Each of the three national credit rating agencies, Equifax, Experian, and TransUnion are required to provide you with one free credit report per yearusa.gov. You can request a report by going to annualcreditreport.com or by calling the credit reporting agencies. If you're planning to purchase the home with your spouse or another person, they’ll need to request and review their credit reports as well. Review your credit reports for any incorrect information and, if you find any, you can contact the credit reporting agency to request a correction.
Checking your credit score beforehand may give you time to improve your credit score by reviewing your credit report for accuracy, paying your bills on time and reducing your balances on your credit accounts. An improved credit score may improve your prequalification terms, potentially yielding better options and more negotiating power.
Debt-to-income ratio
Your debt-to-income ratio is a comparison of your monthly debt payments to your monthly income, generally shown as a percentage. This is a key metric for many lenders when determining your ability to manage monthly payments and repay borrowed funds. When it comes to mortgage prequalification, a lower debt-to-income ratio generally suggests a more manageable balance between your debts and income, indicating to lenders that you’re more likely to afford and manage mortgage debt.
Your down payment
Some loan types may require less of a down payment, such as only a 3% to 5%. Federal Housing Administration (FHA) loans require at least 3.5% down paymentfha_loan_requirements, while the U.S. Department of Veterans Affairs (VA) loans may not require any money downva-loans.
Higher down payments often net more favorable terms from lenders. If your down payment on a conventional loan is less than 20%, you will typically have to pay private mortgage insurance (PMI), which covers the lender if you stop paying your mortgage and default on your loan. The yearly cost of PMI is generally a small percentage of your outstanding loan balance and is added to your monthly mortgage payment. You can generally request to have PMI eliminated once your outstanding balance reaches around 80% of the original loan amount.
How to get prequalified for a home loan
Now that you have an idea of what lenders are looking for, let’s consider how you can get started with mortgage prequalification today.
Gather your documents and information
Once you feel informed and confident of your financial situation, you’ll typically start by collecting the essential financial documents that paint a picture of your income, debts and assets. This could include:
- Recent pay stubs or W-2 forms
- Asset verification
- Credit report
- Federal tax returns
- Bank statements
- Documentation regarding current loans and debts.
Speak with your lender about the information they require for mortgage prequalification.
Meet with a lender or apply online
When you have your financial documents ready, the next step is to either meet with a lender in person or prequalify for a home loan online. During your meeting or through the online process, you’ll share your financial information and the lender will assess your qualification.
Get your estimates
After your information has been reviewed, the lender will typically provide you with a general estimate of how much you might expect to borrow. This prequalification is, however, not an approval or guarantee for a loan amount but a general idea of your borrowing power.
What happens after mortgage prequalification
Once you’ve settled on a home, made an offer and had it accepted, the next steps are relatively straightforward.
Choosing your lender
Different lenders offer various loan options, rates and terms. It may be worthwhile shopping around to compare offers so you can make a more informed decision. This is generally where you will choose the type of mortgage you’re interested in, such as a fixed-rate mortgage or adjustable-rate mortgage (ARM).
Applying for your loan
After you’ve chosen a lender, the next step is to formally apply for a mortgage. You’ll need to submit detailed financial information and documentation, which your lender thoroughly reviews before making a final decision on your loan application. This is also when your lender will typically order an appraisal to verify the value of the home you’re buying.
Closing
Closing is the final step in the homebuying process. Before closing, you’ll typically receive a closing disclosure, which outlines the final costs of your mortgage and transaction. It’s generally recommended to review this document carefully to ensure all details are correct. During closing, you’ll sign the necessary paperwork, pay any remaining closing costs and officially take ownership of your new home!
In summary
Prequalification can provide more insight into different mortgage loan options and might help you narrow down the search for your dream home. It could potentially also give you a competitive edge because it demonstrates your seriousness as a prospective buyer. Additionally, the prequalification process may help highlight steps you can take to put yourself in a better financial position for homeownership. Chase does not offer mortgage prequalification. Once you’re ready to start the homebuying process, you can connect with a Home Lending Advisor and start the mortgage preapprovalaffordability_hl000008 process with Chase.
Mortgage prequalification FAQs
Does prequalification affect credit score?
Prequalification typically does not affect your credit score. Mortgage prequalification usually involves only a soft credit inquiry. Soft inquiries are only visible to you and do not affect your credit scores. The intent is to give you an estimate of how much you might be might eligible to borrow.
Preapproval can have an impact on your credit score; however, the impact is usually minimal and temporary. When you apply for preapproval, the loan provider will perform a hard inquiry on your credit report. This inquiry allows the lender to assess your creditworthiness and financial stability. Hard inquiries can slightly lower your credit score by a few points, but the impact is usually minor and short-term.
How long does it take to get prequalified?
Getting prequalified for a mortgage is usually a quick and basic assessment that gives you an idea of how much you might be able to borrow from the lender. Typically, prequalification can be done relatively quickly, often within minutes to hours.
Preapproval usually takes longer than the prequalification process because it involves a more thorough review of the borrower’s financial background and credit history. You will need to submit detailed documentation such as pay stubs, tax returns and other financial documents. The timeline varies for preapproval, but it typically takes several days to a week or more.
The actual timeframes for both can vary depending on the loan provider’s processes, the complexity of the borrower’s financial profile and other factors.
How much will I prequalify for?
The amount you prequalify for depends on various factors, including your income, debts, credit score and financial history. Lenders weigh these factors when estimating how much you might be able to borrow responsibly. Different lenders may provide different estimates.
How long does prequalification last?
A mortgage prequalification is typically valid for several weeks to months, depending on the lender. Prequalification is designed to provide a window to shop around for homes or loans with an idea of what you might afford based on your current financial situation. It’s generally recommended to check with the specific lender as the validity period can vary. You may need to update your prequalification if your financial situation changes or if your prequalification expires before you secure a loan.
What is a prequalification letter?
A prequalification letter is a document from a lender stating that you’ve been prequalified to borrow up to a certain amount based on a preliminary review of your credit and financial information. This letter is not, however, a commitment to lend but may yield a general estimate of your borrowing power.
