There was a point when getting a mortgage was fairly easy— when the real estate was booming and the qualifications were not as strict. Now, however, the real estate market is far from booming, and with a difficult economy new homebuyers are forced to jump through hoops if they hope to get a mortgage. Of all of these, the first hoop is prequalifying for a mortgage.
Just what is prequalifying? You prequalify for a mortgage only if you meet the financial and background requirements. This means that a mortgage lender believes (or rather, you have conveyed to them) that you can meet your regular mortgage payments and will not fall into greater debt.
Now, first and foremost, new homebuyers should be aware of the “prequalify vs. pre approved” terminology. These terms appear to be so similar that many mistake them for being entirely interchangeable. However, their meanings can be quite different— there are actually many interpretations from those working in the real estate and mortgage industries. Nevertheless, it is safest to go with the most basic understanding— essentially, pre approval for a mortgage is a written statement that you are qualified, whereas prequalification is more of an informal acknowledgement. Basically, to prequalify for a mortgage is a great first step, but the next step is to complete this by getting a letter of preapproval.
Still, how does one even begin this process? While you may be termed “homebuyer” throughout the process, to prequalify for a mortgage and then be preapproved means you haven’t actually bought the home yet. Generally, you start the process to prequalify for a mortgage before even selecting the home you want to buy. In fact, most legitimate agents in today’s real estate market do not want to work with prospective homebuyers unless they have a letter of preapproval.
To get this letter, you’ll need to see a mortgage lender. Mortgage lenders will want to evaluate your current financial situation, so be sure to have this information ready when you meet with them. They will tell you precisely what they will need from you, but some good things to have ready ahead of time are W2 statements or 1099 forms, recent bank statements, recent pay stubs, tax returns from the past two years, proof of investment income as well as proof of any other income.
Keep in mind that when looking to prequalify for a mortgage, it is a good idea to “shop around.” This means talking with a few different mortgage lenders in your area in order to find the best mortgage package that suits your needs. Two or three should suffice, as loan packages tend to have few differences between them and pricing is usually comparable. It also important to select a reputable lender simply because home sellers and real estate agents are looking more closely at this factor. Know that most large brokerages and banks (national ones, anyway) have local branches; so you should ask a local realtor for recommendations. You can also look up mortgage lenders on the Better Business Bureau's website, which will also help give you a better idea of what kind of reputation they have.
Now, in today’s world dominated by the Internet, many prospective homebuyers may find themselves wondering if they can prequalify for a mortgage online. The answer is yes, you can. However, you may still need to have an in-person meeting before receiving that letter of preapproval. While one must be careful when looking to prequalify for a mortgage online, the benefit is that doing so often allows you to compare multiple loan offers at once (LendingTree and Bankrate are two examples of websites where you can do this). Going online will also allow you to see if you meet the requirements for an FHA loan, which is important information to have.
Of course, it is important to know that when you seek to prequalify for a mortgage with the lender of your choice, you are not obligated to that lender. Even a letter of preapproval is not binding. It is just a statement that the mortgage lender is willing to loan you the money to buy your home, but that doesn’t mean you have to actually seek out that loan when the time comes.
Now, a letter of preapproval will also not necessarily specify the loan type or rate. There is reason logic behind this, as mortgage rates fluctuate almost daily. Therefore, the exact rate will likely not be determined until the actual date your official mortgage papers are drawn up. Nevertheless, you can get a good idea of what you rate will be by using an online prequalify for mortgage calculator.
If you’re still not convinced that you need to prequalify for a mortgage and ultimately get a letter of preapproval, know that real estate agents who don’t care if you are preapproved may not be very trustworthy. Letters of preapproval tell you and the real estate agent exactly how much money you are able to borrow, which therefore indicates what your housing budget is. Real estate agents also view preapproved homebuyers as being more serious because they have already taken the first steps toward home ownership. Remember that for most agents, the issue is not whether they can get an offer, but whether they can close the deal, and a preapproved homebuyer helps to ensure that.
You do need to start looking to prequalify for a mortgage before making inquiries with real estate agents and home sellers, however, be aware that there is an expiration date on letters of preapproval. This also applies to any documents that lenders verify in order to preapprove you. Typically, the given time period is 90 days before expiration. However, you can always get your letter of preapproval revalidated (although there may be fees and/or updated financial information and documents needed). Of course, be sure to notify the lender if any other changes— credit score, employment status, income, assets, etc.— occur in your life while the letter is valid.