Being prepared is one of the smartest things you can do to help the home buying process run smoothly. Getting prequalified for a mortgage gives you an idea of what your loan program and the amount you could borrow might look like in advance. This can give you a big advantage at different stages of your house hunt, from helping you prepare your budget and set your expectations, to strengthening your negotiating position with the seller when you’re making an offer on a home.
Regardless of the loan amount you’re prequalified for, stick to your budget and the amount you can comfortably afford. Your lender may prequalify you for more than you think you can comfortably afford. If this happens, you can always scale back to a lower loan amount. You’re not obligated to share your prequalification amount with real estate professionals, so simply ask them to only show you homes in the price range that fits your financial comfort zone.
What is prequalification?
Prequalification is an estimate of what you might be able to borrow. It:
- Provides an estimate of your borrowing power.
- Is based on information you provide verbally about your income, assets, and sometimes a credit check.
- Can often be done online.
- Is offered by most lenders at no cost.
- Prequalification is neither preapproval nor a commitment to lend; you must submit additional information for review and approval.
Why get prequalified?
Once you’ve built your budget and know how much of a monthly payment you can comfortably afford, getting prequalified allows you to estimate the loan amount and type that’s right for you. Then, when you’re searching for a home, you’ll know which homes are in your price range.
Why get conditionally approved?
A conditional approval is a more serious step toward buying a home. It is a conditional commitment in writing for a specific loan amount and loan program. Provided all the specified conditions are met, the lender is obligated to go through with the loan. (However, you are free to walk away from this commitment before anything is signed.) It will also give you a general idea of your interest rate and potential monthly payment.
It’s important to note that while prequalification can give you an idea of what you could borrow, the amount you should borrow should never be more than what you can comfortably afford.