Pre-qualification: A Great Place to Start
If you’ve decided you want to buy a house and will need a loan, it’s time to get pre-qualified. This is a no-cost, no-commitment, 10-20 minute analysis with a loan officer that will give you a great starting point for your new home purchase. You can get pre-qualified with a loan officer in person, on the phone, or online.
In a short time, a loan officer can give you a good idea of what purchase price you can afford, what your monthly payment might look like and how much money you may need at closing for a down payment, closing costs or other costs. They’ll then give you a pre-qualification letter.
Pre-qualification is less formal than getting pre-approved, but it is a good place to start because it is simple and quick. It gives you a great feel for what your budget is and what you need to do next in the home buying process.
A loan officer does not need to pull your credit at this point. It’s helpful if you can tell them your credit score. If you’re worried about your credit score or don’t know what it might be, then you can check it yourself at www.annualcreditreport.com or allow one loan officer to pull your credit. (If you talk to more than one loan officer, just tell the other loan officers your credit scores.)
With a prequalification letter, you have a good idea of how much you can spend on a house and can start looking at what’s available in your price range.
Tip: You can work with one loan officer to get pre-qualified, or you can talk to several loan officer and use this opportunity to also compare lenders and their loan costs. Learn more about how to shop for a lender and compare loan quotes.
Pre-approval: The Next Step, for When You’re Ready to Buy
Working with a loan officer to get pre-approved is the next step to buy a home. This is when you complete a full application with a loan officer, they pull your credit, you submit documentation and they verify your information.
It’s smart to do this step before you find a house you want. You’ll need to have a pre-approval letter ready that you can use immediately when you find a property you want to offer for, especially in a competitive housing market.
Tip: You can choose to skip pre-qualification and go right to pre-approval, especially if you’ve already decided which lender you want to use or have a specific property in mind.
Your loan officer will analyze your loan application to consider 3 things (sometimes called the 3 C’s) to generate a pre-approval letter:
- Capacity to repay
- Capital (or cash)
- With your authorization, a loan officer will pull your credit. The higher the credit score, the better the terms you’ll be offered. Typically, lenders have options for scores above 580.
- Capacity is your ability to make the monthly loan payments. A loan officer will look at your gross monthly income and your debts. This analysis can be very simple if you’re a W-2 employee, or it can get a little more complicated if you’re self-employed. A good loan officer can help you through that process.
- And third, a loan officer will look at your capital or cash, which is how much money you have set aside for a down payment, closing costs and reserves that the mortgage company might require. The loan officer will verify those funds through bank statements, retirement funds or other sources of capital.
After verifying your credit, capacity and capital are sufficient, the loan officer will write you a pre-approval letter, which is an offer (but not a guarantee) to lend you money based on that information.
A good loan officer will also run Fannie Mae or Freddie Mac’s automated underwriting software to try to generate preliminary underwriting approval. This step makes a pre-approval letter even stronger.
When you work with a good loan officer for pre-approval, your offer on a house can be as good as cash, because they’ve verified that you will very likely qualify for the loan.
Tip: A pre-approval letter is usually valid for 90 days. After 90 days, you can talk to your loan officer, and they can update your letter if your financial situation hasn’t changed.