If, like the majority of homebuyers, you intend to finance your home purchase with a mortgage (and by finance, we mean borrow money from a lender like our affiliate Inspire Home Loans), you're going to hear the word "prequalification" a lot—and you're probably reading this because you already have! Well, you came to the right place. We'll walk you through what prequalification means, how it works, and why getting prequalified as soon as possible is a smart move on your journey to homeownership.
What prequalification is and how it works...
Like any financial institution that lends money to customers, enabling them to make high-dollar purchases that might otherwise be out of reach—like, ahem, a new home—mortgage lenders need to make sure they're lending the right amount of money to the right (AKA "qualified") borrowers. That means borrowers who are likely to repay their loan in full, and with interest, over time. The first step toward identifying who those qualified borrowers might be is, you guessed it, prequalification.
As it pertains to home loans, prequalification is a quick look into how creditworthy you are, in which a mortgage lender runs a credit check to ascertain:
- Whether you currently have a qualifying credit score and timely repayment history
- What type of home loan you may qualify for
- How much you could borrow based on your debt and income
- How much you'll likely need for a down payment
If everything checks out, the lender will prequalify you for a certain loan amount based on either your maximum qualifying potential or preferred payment range. Note that this is not a guarantee of approval, but rather helps to streamline the homebuying process when you officially apply for a mortgage to purchase a specific house. And the great thing is that getting to this point requires no commitment to purchase, plus just a little of your time so that you can provide basic financial information and authorize a credit check.
Why prequalification is the smart homebuyer's first move...
While prequalification helps sellers ensure that you’re ready to purchase a home, it also provides you with a preliminary assessment* of your ability to qualify and helps you in a number of other important ways:
- It helps you set the right budget for your home purchase
- It establishes a relationship with a lender, putting you in a position to quickly get approved for a home loan when you're ready to buy
- It highlights what you need to do to improve your credit if it doesn't meet the threshold to qualify for a home loan (especially if your lender has a homebuying assistance program like The Ascent Club!**)
Even if you're just curious about finding out whether you could buy a home, that's a lot of compelling reasons to prequalify sooner than later. At the bare minimum, you'll come away smarter about your finances, and better equipped to lay the right foundation for a home purchase when the time is right.
