Mortgage prequalification: What is it and how does it work?

The process of applying for a mortgage and buying a home can be a long one. For many people, getting prequalified for a mortgage is one of the first steps they take in that process.

Mortgage prequalification is a relatively informal process where you give a lender some information about your credit and finances, and the lender tells you the type of loan and amount of money you’ll probably qualify for. While it’s not a binding offer, it can be a way to get a ballpark idea of how much home you can afford.

We’ll break down how to get prequalified for a mortgage and why it’s a good idea if you’re hoping to buy a home.

What is mortgage prequalification?

Prequalifying for a mortgage is the first step in getting a loan. When you apply to prequalify, the lender will ask for some basic information about your finances, including your income, current debt payments, and the expected amount of your down payment.

The lender will then give you an estimate of how much you can borrow so you can use that information to guide your house search. If you prequalify with multiple lenders, you may get prequalified for different amounts. You can also use this home affordability calculator from Rocket Mortgage® to get an idea of how much home you can afford.

Some real estate agents may ask you to get prequalified before you start looking for homes so they know what kind of properties to show you.

Prequalifying is informal, so lenders mostly trust the info you give them rather than conducting any underwriting. Still, it’s an important step to take because it can help you identify potential issues with your credit or debt early in the process, letting you fix things before you submit an official application for a loan.

What’s the difference between prequalification and preapproval?

Prequalification and preapproval sound quite similar, but they are two different things. In general, getting preapproved for a loan is a more formal process but still not as involved as fully applying for a mortgage.

For example, when prequalifying, you might tell your lender that you make $100,000 a year. When getting preapproved, the lender will likely ask to see a paystub to confirm your income is what you said it is.

If you get preapproved for a loan, you can feel more confident that the terms offered are close to what you’ll get when you finally apply for the loan. You can also use preapproval to show sellers that you’re a serious buyer, making your offers more appealing.

How does mortgage prequalification work?

Prequalifying for a mortgage involves working with a lender to see how much money you can borrow. The process goes roughly like this:

1. Choose a lender. Find a lender that has loans with terms you like. You can also prequalify with multiple lenders.
2. Submit your details. Lenders will want info about you, like your address, name, and Social Security number, as well as financial information like your income, where you work, any assets you have, and any debts you owe.
3. Get your prequalification amount. The lender gives you information about how much you can borrow.

Prequalification is informal, so most lenders use a soft credit pull, if they check your credit. This means it won’t impact your score.

How to get prequalified for a mortgage

If you’re ready to get prequalified for a loan, you can follow these steps that will hopefully make the process easier for you.

1. Gather financial information

First, you'll want to gather your financial information. Having all of this information in one place can help you stay organized throughout the process. While the exact information your lender will need may vary slightly, you're likely to need:

• Your Social Security number
• Your last several pay stubs
• Tax returns (if you have a business or self-employment income)
• Information about any debts you have, including other mortgages, credit cards, or any other debt; you'll likely need the total amount of the debt owed, as well as the amounts of your monthly payments
• Information about any assets you own, including savings, checking, retirement, and investment accounts
• Any bankruptcies, judgments, or other similar legal actions against you in the past several years

2. Choose a lender     

Next, choose a lender to prequalify with. Keep in mind that prequalification won’t transfer from lender to lender, so look for advice from friends and family or your real estate agent to get a recommendation for a lender that is easy to work with and offers competitive mortgage rates.

3. Submit the prequalification form

Once you've chosen a lender and gathered your financial information, you can submit the prequalification form. The exact substance of the prequalification form may vary depending on the lender, but it will generally have you submit all of the financial information you gathered above. In some cases, your lender may be able to give you a prequalification right away, while in other cases, it may take a few days for the bank to approve your prequalification.

4. Receive your prequalification letter

Depending on the lender, you’ll get your prequalification letter in a few days or weeks. You’ll want to share it with your agent so they can get a better idea of the type of properties to show you.

Keep in mind that prequalifications may no longer be valid if your finances change after you prequalify. Financial changes may also change what type of loan you could qualify for. Preapprovals usually last for 60 to 90 days.

If you don’t buy a home within a few months of getting prequalified, you may want to get prequalified again to see if the details of your potential loan have changed.

Tips for raising your mortgage prequalification amount

While a mortgage prequalification is not a formal mortgage approval, it can give you an idea of how much of a mortgage you're likely to be approved for. If you don't receive the prequalification amount you’re hoping for, here are a few tips for raising your prequalification mortgage amount:

• Improve your credit score: One of the best things that you can do to raise your prequalification amount is to improve your credit score. Having a great credit score generally will allow you to get a loan with a lower interest rate, and a lower interest rate means you can borrow more money for the same monthly payment amount.
• Reduce existing debt: Lenders have guidelines that they must follow regarding how much debt you can have and still qualify for a mortgage. If you have too much debt, it may limit the amount that you can be prequalified for.
• Save for a larger down payment: While having a larger down payment may not affect the amount that you’re prequalified for, it can help by reducing the loan amount that you need.
• Increase your income: One of the factors that lenders look at when issuing a mortgage prequalification is your ability to make the monthly mortgage payments. Increasing your income may increase the amount of money that banks are willing to lend you.”

The bottom line: Prequalifying for a mortgage helps you budget for a home

Prequalifying for a mortgage is an informal process where you tell a lender about your finances, and the lender tells you the details of the mortgage you’re likely to qualify for. This can be a way to get a sense of how much you can borrow, helping you set a budget when shopping for a home. Once you’re ready to get deeper into the process of buying a home, you can move on to getting preapproved for a loan.

If you’re ready to start seriously shopping for a home, you can apply for a mortgage with Rocket Mortgage^®.