You've decided to make the move from renting to owning your own home, and have heard about a process called prequalifying for a mortgage. Prequalifying for a mortgage can give you an advantage when you're looking for your version of the American dream. By making the proper preparations, you can put yourself in the best possible position to obtain prequalification.
When you go through the prequalification process for a mortgage, you get a rough idea of how much house you can actually afford. First you provide your financial information to a lender, including your income, investments, credit card debt, car payment, student loans, and any other financial obligations or assets. The bank produces an estimate of how large a mortgage you will likely qualify for. Banks usually don't do a "hard" pull on your credit report to verify the information you provide, so a prequalification is not binding on the lender. However, having a prequalification in hand makes you more attractive to sellers. It also makes the process of obtaining an actual mortgage a little easier because some of the preliminary work has already been done.
Before You Prequalify
You don't want the prequalification process to produce any surprises, so do your homework. Obtain copies of your credit report from all three major credit reporting bureaus: TransUnion, Equifax and Experian. You're entitled to one free report every year from each bureau. Submit corrections for any mistakes you find on the report, such as old debts that are erroneously showing up as unpaid. You should also obtain a credit score for each report, although you might have to pay for that information. If there are legitimate upaid debts that can cause a problem, you should pay them off. If your credit has taken a hit due to circumstances beyond your control, or because of a dispute with a vendor, add a note to your credit report, and be prepared to give the same information to potential lenders. Pay down your credit cards as much as possible and establish current payment patterns for all your bills.
Gather the documentation that you will provide to the lender for the prequalification process. Many lenders will want to see evidence of steady employment with consistent or increasing income for at least the past two years. You'll need to provide your W-2 forms and pay stubs if you're employed, or prior year tax returns and worksheets if you're self employed. Be honest about past credit problems, but emphasize a good payment record in the present by presenting copies of receipts for rent, utility and credit card payments.
Prequalifying versus Preapproval
If you're ready to make a serious bid for a house, you might want to obtain preapproval for a mortgage. This a step up from prequalifying. With preapproval, the lender obtains a copy of your credit report and verifies the information you provided with your employer, landlord, and any other creditors or references you list. If you pass the preapproval process, the lender makes a binding offer for a mortgage that lists the amount you are entitled to borrow along with the interest rate and other relevant information. Your preapproval remains in effect for a specified period of time and allows you to make a firm offer immediately if you find a house you love.
- Bankrate.com: Prequalified? You Have an Edge
- Bankrate.com: Get Preapproved, Not Just Prequalified
- Bankrate.com: Can a Low Credit Score Sink Your Mortgage?
- HUD.gov: Looking for the Best Mortgage
- U.S. News and World Reports: Are You In Over Your Head?
- Bank of Tennessee: Prequalifying Made Easy
- MyFICO: What's In Your FICO Score
- MyFICO: What's Not In Your FICO Score
- FHA.com: Prequalify for an FHA Loan
- MortgageLoan.com: Prequalify for a Mortgage
- Bankrate.com: Loan Prequalification Calculator
- MyFico: About Credit Scores
- AnnualCreditReport.com: Request Your Free Annual Credit Report
- TransUnion: Get Your FREE Credit Score with 3-Bureau Credit Monitoring
- Equifax: Credit Reports, Credit Scores
- Experian: Personal Services
- How to Buy a House: The Down Payment
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