The purpose of going through the mortgage prequalification and preapproval process is so that you know whether or not a lender is willing to offer you a home loan. And if so, the amount they are willing to lend you. Once you are prequalified and/or preapproved for a loan, you can shop for a piece of property with a good amount of certainty that you will be able to purchase the property if you are interested in owning it. However, prequalification and preapproval is important for several reasons in addition to letting you know whether or not you qualify for a loan. Being prequalified and/or preapproved is important when making an offer on a home. Sellers are apt to take prequalified and preapproved buyers more seriously, and in most cases they will accept offers made by candidates with prequalified and preapproved statuses over those that cannot prove they are eligible for a loan.
What is Required for Prequalification and Preapproval?
Most lenders will require that you submit several pieces of information and paperwork including:
- Your tax returns for the past two years and/or your W-2s
- Proof of employment and/or paystubs from your employer for the past several months
- If you are self-employed, your business tax returns for the past two years along with a current balance sheet and profit/loss statement that contains year-to-date information
- Checking and savings account bank statements
- Statements for all of your other accounts – such as retirement accounts, brokerage accounts, stocks, bonds, etc. – – for the past several months
- Information about your current mortgage if applicable
- Contact information for your landlord if you are currently renting
- If you are divorced, a copy of the decree
Your credit report and your credit score will also play a role in whether or not you are prequalified and/or preapproved for a loan – as well as the potential dollar amount of the loan. If your credit report shows consistent missed payments, a high debt to income ratio, charged off debt, bankruptcy, or any other problems, your ability to qualify for a loan may be at risk. Therefore, it’s very important to know the status of your credit report prior to seeking prequalification and/or preapproval for a mortgage so that you can attempt to fix any issues that may hinder your ability to obtain a loan.
If you cannot achieve a prequalified or preapproved status or if you anticipate having problems getting prequalified or preapproved, it’s important to seek the advice of a mortgage broker or mortgage banker. There may be alternatives for you to consider. Keep in mind that your credit score plays a big role in whether or not you can be prequalified or preapproved for a mortgage, so if your score is low, you might want to work on getting the number higher before you start looking for a house. The best mortgage interest rates typically go to the people with the highest credit scores.