It’s easy to get swept away in the process of looking for your dream home. Most of us are so focused on finding a house that ticks the boxes on our wish list that we forget one of the most important steps: finding out much we can afford to pay.
This is where getting prequalified for a mortgage comes in. Although the terms are sometimes used interchangeably, there are some key differences between a pre-qualification and a preapproval from a lender.
What is a Pre-qualification
A pre-qualification is a more general, less in-depth process and does not require a formal loan application. You provide the lender with basic information about your income, assets, and debts, and the lender performs a credit evaluation, giving you a ballpark estimate of what kind of mortgage you can afford.
Its function is more to help a buyer understand what kind of loan they would generally be eligible for, but it is not a guarantee.
Finding out what kind of loan you qualify for can be a very helpful exercise when home buying because it automatically helps buyers zero in on a budget. Houses beyond that pre-qualification limit are no longer an option, and this can help take some of the emotion and price creep out of the buying decision. A pre-qualified buyer is also more attractive to a seller than one without any pre-approval or pre-qualification.
How to Get Pre-qualified
- Tally your annual income. This includes all income—dividends, interest, side hustles, rental income, anything that can be verified. The more income you can document, the larger the loan you can qualify for.
- Choose a mortgage term and rate. Although you will not be “locked” or guaranteed, this will give you a good estimate of what your loan will cost you each month.
- Gather and decide on how much money you can afford to put down as a down payment. This will impact your final loan amount.
- Total up your other monthly debt payments. This includes things like car payments; this helps lenders understand how much debt you’d be able to carry.
- Estimate the monthly property tax and homeowners insurance on the properties in your price range. This is included in your monthly mortgage payment and helps you calculate how much you can afford.
Once you’ve gathered this information, you’re ready to calculate an affordable monthly payment and determine what kind of loan you are eligible for.
Online pre-qualification calculators make it quick and easy to help you figure out if your dream home is an affordable fit for you. At Eagle Home Mortgage, we believe that an educated buyer is the very best kind. We walk you through the loan pre-qualification process so you can have an accurate picture of your eligibility and feel confident in securing a loan that makes your dream home a reality.