When you start the home buying process, you need to know what types of homes are in your price range. To determine this, you'll have to look at your income and debts to calculate how much you can afford each month. A lender will also factor in the amount of your down payment when giving you a pre-qualification amount.
What It Is
Mortgage pre-qualification is an estimate of the highest amount that a bank would give you for a mortgage. You receive this amount after discussing your financial situation with a lender. The lender bases this amount on your stated income and debt levels. Sometimes, pre-qualification includes a preliminary evaluation of your credit history. Once the lender gives you a pre-qualified amount, you can then use it to look for homes that are in your price range.
What It's Not
A mortgage pre-qualification is not a guarantee of a loan. It gives you an idea of how much you can afford, but it is not a formal estimate. If you give false information to the lender or do not reveal your entire financial situation, you may not get approval for the full amount of your pre-qualification statement after reviewing your actual financial data.
Pre-Qualification versus Pre-Approval
Mortgage pre-qualification and pre-approval are similar, with one important difference. In order to get a pre-approval, you must submit data to the mortgage company. It will look at your income statements, debt statements and credit report to get a full look at your financial situation, then state the amount for which that they might approve you. In the pre-qualification, the lender is only basing the amount on the information that you state, not verified data. The pre-approval is a more serious commitment on the part of the lender and if you are making an offer on a home, having a pre-approval will cause homeowners to take your offer more seriously.
To get pre-qualified for a mortgage, make an appointment with the mortgage expert at your bank and discuss your plans. She'll likely be able to give you a printed statement for your pre-qualification. Additionally, you can do this over the phone or on the Internet with a broker who compares loans from several different lending institutions.