Mortgage prequalification: How it works and how to get prequalified

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Mortgage prequalification helps you determine how much house you can afford . When you apply for prequalification with a mortgage lender and are approved, they will give you an estimated maximum loan amount so you know your home-buying price range. You may also receive a tentative interest rate.

Generally, mortgage prequalification happens after you decide to buy a house but before you start seriously looking at properties.

"It is a good way for you to determine if you're in the right place financially to move forward with considering buying a home," Stephanie Amedee, branch manager with Semper Home Loans, Inc., said via email.

Important note: Your prequalification amount doesn't tell you how much you should spend on a house — it's what you may be allowed to spend. Review your finances carefully to see what monthly mortgage payment comfortably fits your budget.

Mortgage prequalification is a fast and informal exercise, accomplished in three steps:

You tell the lender about your employment, income, and assets.

The lender will typically run a soft inquiry on your credit (which doesn't hurt your credit score) to see how much debt you have and assess your creditworthiness.

The mortgage lender uses the self-reported information to determine your prequalification status and potential loan amount.

You won't need to provide supporting documentation like pay stubs, W-2s, tax returns, or bank statements for a home loan prequalification. That will wait until you move forward with the more stringent mortgage preapproval.

Most lenders will do a mortgage prequalification online, over the phone, or in person, said Amedee. While every mortgage lender has a slightly different process, you can expect to get your results quickly — sometimes in minutes. It's also typically free to apply for prequalification.

Some lenders might require you to apply for prequalification again if you haven't moved forward in the mortgage process after a certain amount of time. With others, technically, your prequalification never expires. However, if your financial situation changes, the amount the company is willing to lend you may change as well.

What you can expect to get prequalified for

Once you have a home loan prequalification, you will gain some actionable house-hunting information. Most importantly, you will have an understanding of just how much a lender might finance for you.

How much will you qualify for? It primarily hinges on your debt-to-income ratio — the percentage of your gross monthly income dedicated to monthly debt. Lenders typically look for a DTI between 28% and 36%. Here is an example:

With an annual household income of $100,000

And an interest rate of 6.5% on a 30-year fixed-rate mortgage

You might comfortably afford a home valued from

$350,000 (28% DTI) to over $450,000 (36%).

Use the Yahoo Finance ' How much house can I afford' calculator to run other scenarios.

With a prequalification, the lender will provide you with:

Prequalification vs. preapproval: What's the difference?

The terms mortgage prequalification and mortgage preapproval are often used interchangeably because the process of obtaining them is similar.

However, preapproval is much more official than prequalification. When applying for mortgage preapproval, you must supply documentation supporting your claims about your financial situation. Plus, the lender will run a hard inquiry on your credit (which may cause your score to drop slightly).

Home sellers typically prefer a preapproval letter over a prequalification letter because if you're preapproved, your lender is giving you conditional approval (instead of just a potential loan estimate) to lend you a certain amount.

Important note: "You cannot be guaranteed a mortgage until you have been cleared to close by underwriting," said Amedee. If you lose your job, fall behind on your bills, or experience a drop in credit score, your preapproval letter may not mean much.

Online prequalification for a mortgage is the most convenient way to get an idea of your buying power. Many lenders offer a free online tool to prequalify, with no impact to your credit score.

After providing some basic information, such as income, monthly debts, and down payment, within minutes you'll know if you prequalify for a mortgage loan online. Again, it's a non-binding estimate.

And because there is no hit to your credit, you can prequalify with more than one lender online to see which one offers you the best home loan options. That's something you'll also want to do once you get to the preapproval stage: shop more than one lender.

Steps to take if you can't get prequalified

If you're denied prequalification for a mortgage or prequalified for less than you expected, ask the lender why. Then you can address the issues and try again later.

For instance, if your credit score is too low, you should check your credit report for errors and contest any mistakes with your creditor or the credit bureaus. You could also pay off some debt to improve your debt-to-income (DTI) ratio or include a creditworthy cosigner on your application.

You might also be able to boost your prequalification amount by increasing your income, said Amedee. A bigger paycheck means more cash flow to cover your housing bill and other responsibilities.

Plus, you may still be able to work with a lower prequalification amount if you put in some creativity and effort. For example, you could purchase a less expensive home that needs cosmetic updates or save up for a larger down payment so you don't need to borrow as much from the lender, said Amedee.

Both options can result in a smaller mortgage, reducing the lender's risk. Plus, if you put down at least 20% on a conventional mortgage, you can avoid paying for private mortgage insurance (PMI) , saving you a significant sum over time.

Does mortgage prequalification hurt your credit?

A mortgage prequalification typically does not hurt your credit score. The mortgage lender does a soft credit inquiry to check your creditworthiness, which doesn't affect your score. However, a mortgage preapproval — which is often confused with prequalification but is actually a later step in the home-buying process — requires a hard credit inquiry. This will ding your credit score, but the impact is usually minor.

You may be surprised just how much you will prequalify for. It's not uncommon for potential borrowers to get initial approval for more than they expected — which can wreck a budget. It can also lead to disappointment once you go through the more stringent mortgage preapproval process.

Not usually. But it's a good question to ask each lender you speak to. The terms can be used interchangeably; however, you want to understand the impact on your credit score of any pre-loan application process you are undergoing.

Typically, a prequalification doesn't affect your credit and is an initial estimate of your buying power. A preapproval requires a hard credit pull, completion of a loan application, and financial documents for verification.

A prequalification typically lasts from 30 to 90 days, depending on the lender. However, since it is not a firm commitment to offer a mortgage, the clock isn't ticking on your decision or the lender's. As long as your financial situation remains mostly unchanged — and a significant amount of time hasn't passed — the details of the prequal are likely to remain mostly unchanged.

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