Getting pre-qualified for a home loan is a key part of the house-shopping process. It’s also one of the very first steps, so let’s dive into the details. We’ll cover how mortgage prequalification works and describe the main differences between pre-qualification vs pre-approval.
How does mortgage pre-qualification work?
“Approximately how much can I borrow to buy a home?” The mortgage pre-qualification process can help you answer this important question and build a realistic budget by approximating your buying power.
Most lenders (including Clara) will provide you with a prequalification letter, which spells out what you may be able to afford. In other words, it’s is an estimate of which loan program you’d likely qualify for if you applied for a mortgage with the given lender.
Pre-qualification is based on a basic review of self-reported financial information, such as asset, income and debt information. It’s also common for lenders to perform a soft credit pull as part of the prequalification, which won’t impact your credit score.
Getting prequalified for a home loan is generally a quick process. At Clara, our online system is simple and streamlined—meaning you can get a free personalized prequalification letter in just 3 minutes. Since there’s no commitment involved, you can get prequalification letters from multiple lenders.
Benefits of prequalification
While pre-qualification letters aren’t required for your home search n, many real estate experts recommend getting pre-qualified for a home loan. Here are a few of the key reasons why:
- More efficient home search. You won’t waste time looking at properties that are beyond your buying power.
- Early identification of credit problems. Unresolved errors or issues on your credit report might impact your pre-qualification—and it’s better to get them cleared up early in the home-shopping journey, rather than when you’ve found a home you love and want to make an offer.
- Show real estate agents that you’re serious. In some markets, realtors prefer to show properties only to buyers who already have prequalification (or pre-approval) letters.
Prequalification vs pre-approval
In general, mortgage pre-approval involves a more thorough, complete review than a prequalification. For a pre-approval, many lenders verify your financial information and closely examine documentation to determine about how much it would be willing to lend you. “Pre-qualification” and “pre-approval” often mean different things to different lenders, so it’s important to understand how each particular lender uses the terms.
With Clara, a pre-approval means an underwriter has reviewed your application and evaluated and verified your assets, income, liabilities and credit by reviewing a full credit report and supporting documentation.
A pre-approval letter can help make you a stronger buyer in a competitive housing market. Real estate agents often recommend a pre-approval letter when shopping for a home as a signal that you’re serious and will qualify for a mortgage—even more serious than having a pre-qualification letter would imply.
Once you’ve been pre-approved and have an accepted offer on a home, the next step is to complete your loan application and get approved for a mortgage. Learn more about the various steps of the home buying process with our guide for first time buyers.
Curious about your buying power but not quite ready to get a pre-qualification letter? Find out how much house you can afford in just a few minutes with our Home Affordability Calculator. Ready to start shopping? Clara can help you shop with confidence! Chat with one of our licensed Loan Specialists or get your personalized rate quote.