Mortgage Prequalification: Pros and Cons
Buying a house can be a long process. So one way to speed the mortgage part of it is to get prequalified. In this article we’ll explain what a mortgage prequalification is and why you might want to get prequalified.
What Is Mortgage Prequalification?
It is an estimate of how much a borrower can be approved for. A mortgage prequalification is based on income, credit score and other factors. The prequalification process is not as difficult as the preapproval process. Moreover, it can usually be done through an online form or a phone call that provides some financial information to a lender.
Pros of Mortgage Prequalification
Knowing Your Budget
One advantage of getting a mortgage prequalification is that you’ll have an idea of what you can afford before you shop for a home.
Craig Garcia, president of Capital Partners Mortgage in Coral Springs, Florida says: “sometimes, potential homebuyers may have an unrealistic perception of payments on a particular house. This is due to the way some of the information on mortgage payments may appear online. That’s why having a strong knowledge of what a realistic payment is on a home can help homebuyers focus in on properties that match their budgetary desires.”
In addition, you’ll also know where you stand with closing costs. Knowing how much money you’ll need to bring to closing, will help you better manage your spending.
Being in a Stronger Position
A prequalification can put you in a “better negotiating position with the seller,” says Peter Boomer, a mortgage executive at PNC Bank. Nowadays, a preapproval holds much more weight.
Getting prequalified can help let the seller know “you mean business,” says Abel Carrasco, loan originator with Homeowners Financial Group in St. Petersburg, Florida.
Learning More About Your Options
Prequalification is not a formal process like preapproval. However, it gives a borrower the opportunity to provide some information to a lender on income, assets and other important information, says Mac Cregger, senior vice president and regional manager of Angel Oak Home Loans in Atlanta.
Now that the lender has all this information, you can learn about the different types of mortgages that’d better fit for your particular situation. You can learn about any potential first-time homebuyer programs or assistance you might qualify for.
Cons of Mortgage Prequalification
It Can Affect Your Credit Score
If you get prequalified several times over a long period, your credit score will be impacted. In this case, a long period will be getting prequalified in January and then again in June, for example. This isn’t the best decision, because you’re looking to apply for a loan with the most favorable rate and terms.
However, if you make mortgage prequalification inquiries over a shorter window, they’ll have little effect on your score. That’s because credit scoring models group inquiries within a shorter period, usually 30 days, into one inquiry on your credit report. That means, if you can, you should do all your shopping around in a short amount of time.
Once your lender pulls your credit, the same report will be used for underwriting in case you submit a full mortgage application. So the lender doesn’t have to pull it again, since the report is good for 120 days, Carrasco says.
There’s No Guarantee
There isn’t a defined standard on what exactly constitutes a prequalification or preapproval in the mortgage industry.
Most mortgage lenders think of a prequalification as a preliminary overview of a borrower’s needs and qualifications. It is designed to give the borrower an understanding of what may be possible. Basically, prequalifying doesn’t mean you’ll get a loan. In fact, if the prequalification process isn’t as specific as the preapproval or doesn’t go into sufficient detail about your financial situation, you can still get denied. In other words, prequalifying can give a false sense of security.
Now it’s time to get a preapproval.
In the preapproval process, the lender reviews your financial situation and credit report and approves you for a specific mortgage loan amount. This requires providing more detailed information. It includes documentation about employment, car and student loans, savings and other debt such as credit cards.
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