Prequalified means a mortgage lender has reviewed of the documents you have provided when seeking a home loan and is confident you will qualify for a mortgage if you decide to apply. Preapproval is a more sophisticated step that emerges from prequalification. Preapprovals are backed by double verification by the firm intending to offer credit. Lenders consider preapproval more reliable than prequalification.
How to Get Prequalified and Preapproved for a Loan
Standard home loans offer a 30-year term at a fixed interest rate. Another popular option for borrowers is a 15-year term with a fixed interest rate, which typically requires a much larger monthly payment. Other options for less well-qualified borrowers are adjustable interest rate loans, which usually offer a set interest rate for the first 3 or 5 years, after which the rate is adjusted based on the prime interest rate at that time. Going through the prequalification process can help you determine the best mortgage term for your particular financial situation. Here are some tips to help get prequalified for a home loan.
- Have an Active Bank Account
Lenders will review your bank statements for the last 3 to 6 months. Banks and other credit providers use statements to evaluate your income, spending, and ability to service the loan you apply for. This account information informs lenders of how long you have earned a salary and if there has been a progressive increase or decrease in your income. Here are some things lenders will look for:
- Your account must have been active for more than 6 months
- The account balance shouldn’t ever have been negative
- The account should show an increase in income over time
- Ensure you don’t have substantial outstanding debts
- Credit Score
A favorable credit score is important to get prequalified for a home loan. Credit reports show how well you manage your debts, and it’s important to have the highest credit score possible. Some strategies you can use to ensure your credit score remains high enough to qualify for a mortgage include:
- Pay your bills before the due date
- Reduce the number of times you seek new credit
- Consolidate your debts
- Have an emergency fund in a savings account
- Avoid using all of your available credit
- Maintain a Good Debt-to-Income Ratio
Lenders are interested in borrowers with a low debt-to-income ratio. Most lenders won’t extend credit to you if your debt-to-income ratio is 43% or more. If you have an appropriate debt-to-income ratio, you will likely be able to choose from several home loan providers willing to offer you credit.
- Plan Your Paperwork
When seeking a loan from lending institutions, you will be required to provide several documents, including your legal ID, employer details and pay stubs, proof of current address, tax returns, and credit score reports. A criminal record or indications of not paying taxes could make most lenders shy away from extending a home loan to you.
Most lenders will require a down payment of 10% or more of the total mortgage amount. However, some lenders offer smaller down payments; a Federal Housing Administration (FHA) Mortgage has a minimum down payment of 3.5% and is available to all qualified buyers, regardless of income level. With a down payment of 20% or more, you will not be required to pay for mortgage insurance and could qualify for a lower interest rate. A down payment is essential for lenders because it shows commitment from the buyer. It also indicates your ability to save, which means you can comfortably repay the loan.
- Find a Mortgage Company to Prequalify You
Most mortgage companies offer home loan prequalification with no fees or obligation to follow through with an actual mortgage application. Many lenders offer the option to get prequalified through their website.
- Find a Lender to Preapprove Your Home Loan
Preapproval is a more in-depth process than prequalification. Because of this, some lenders charge a fee for this service.
The Difference in Application for Prequalification and Preapproval
Prequalification and preapproval have different requirements and provide different results, as shown in the table below. Preapproval has more must-do things than prequalification.
| Prequalification | Preapproval | |
| Complete a mortgage application | No | Yes |
| Application fee | No | Possible |
| Credit check | Not Required | Required |
| Review applicants’ finances | No | Yes |
| Estimated of down-payment amount | No | Yes |
| Estimate of available loan amount | No | Yes |
| Provide interest rate | No | Yes |
| Locked-in interest rate | No | No |
It’s important to note that the interest rate for a mortgage typically is not locked in until the actual mortgage application is processed by the lender. The interest rate will affect the monthly payment required; generally, the higher the interest, the more the payment will be. Mortgages are structured to pay more toward the interest than the principal amount – which is the actual loan amount – for the first several years of the mortgage term. It’s usually possible to make additional payments that are applied toward the principal, which will help lower the total interest you will pay over the life of the loan. Be sure to ask your lender about this option, and also ask about prepayment penalties
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Read These Related Dwellics.com Blog Articles For More Financial Guidance
- Tips To Make The Home Loan Process Easier
- How to Refinance a Mortgage
- Why Choose A Digital Lender?
- How to Get Free Credit Reports
- How to Improve Your Credit Score
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