The first step when buying a home: mortgage pre-qualification

Step 1: Mortgage pre-qualification

Once you’ve decided that homeownership is for you, you need to check your finances to see how much you can afford to spend on a home. That’s part of the mortgage pre-qualification process.

• What is your income? Your lender wants to know, so dig up your pay stubs, W-2s, tax returns, bank statements or whatever you need to show how much money you bring in every month
• How much do you have available for your down payment, closing costs and reserves? Print copies of your banking and investment statements
• What do you owe to creditors, and how good is your payment history? Your credit score determines your program eligibility and how much your loan will cost

What is mortgage pre-qualification?

Mortgage pre-qualification is usually, but not always, a pretty superficial evaluation of your ability to repay a home loan. In its most basic form, a lender asks you what your gross (before tax) income is, what your monthly debts are (car payments, credit card minimums, and the like), and how much you have saved for your mortgage down payment and closing costs.

Related: How a mortgage pre-qualification letter can put money in your pocket

Many mortgage lenders issue pre-qualification letters without checking your credit report. Nor do they necessarily verify the income, debt and asset information you provide.

What mortgage pre-qualification tells you

Most mortgage pre-qualification letters tell you and a potential seller one thing: that if the information you supplied can be verified, and your credit score checks out, you should be able to afford a loan of X dollars and buy a home at X price.

That is not a commitment to lend. It is not a mortgage loan approval. It can, however, save you a lot of time and potential embarrassment.

Related: Mortgage pre-qualifications are good (but pre-approvals are better)

Mortgage pre-qualification forces you to be specific about your income, assets and debts. It tells you what range of prices you should be considering, and prevents you from shopping in unaffordable neighborhoods and looking silly. It tells you what you can afford now.

In fact, you can do your own confidential mortgage pre-qualification by using a mortgage affordability calculator in the privacy of your own home.

Pre-qualify yourself with our Home Affordability Calculator

What mortgage pre-qualification doesn’t tell you

Mortgage pre-qualification, in its most basic form, does not even involve a lender checking your credit or verifying your income.

If a lender checks your credit score before issuing a mortgage pre-qualification letter, that’s an improvement. At least you’ll know that, should your other information check out, you’ll probably be able to close on your mortgage.

But this enhanced pre-qualification is still not a mortgage pre-approval.

If you don’t complete an application, all you have is a pre-qualification

In the pre-qualification or pre-approval debate, one thing is clear. If you have not completed a mortgage application, provided documentation to support the income and assets you claim to have, and authorized a credit check, you do not have a pre-approval. You have a pre-qualification.

Pre-qualified? It’s time to take the next step

Once you are pre-qualified for your home loan, the next step is easy. Complete a mortgage application with a local or online lender.

Related: How long does it take to get pre-approved for a mortgage?

Your lender will almost certainly input your information into some form of automated underwriting system (AUS), and get a decision:

• Approve
• Refer (which means more information may be needed)
• Refer with caution (usually declining your application)
• Ineligible or out of scope (you are not eligible for the product)

If you receive an “approve” decision, your lender will give you a list of items to bring in. For instance, “Pay stubs to support monthly gross income of $6,327” and “Bank statement(s) showing at least $16.580 in liquid assets.”

Just supply the requested items, and as long as they support your application information, you should receive mortgage pre-approval. You’ll get a special letter indicating that you have “pre-approval” or “credit approval.” And that means you should be able to close on any property that meets the lender’s guidelines.

If you don’t qualify: Try, try again

Once nice thing about addressing your home loan before you go house hunting is that you get a do-over if you don’t achieve approval right away. Your lender should be able to explain why you did not get a pre-approval or pre-qualification.

Depending on how far into the process you get, lenders may have to issue an Adverse Action Notice, which tells you in writing why you did not get a loan offer, or why you got one for a smaller amount or higher rate than expected.

Related: What to do if you're turned down for a mortgage

You, in turn, can address the problem. Low credit score? Commit to raising it to an acceptable level. Debts too high for your income? Pay them down, or refinance them to a loan with a lower payment.

In other words, mortgage pre-qualification helps you eliminate problems before shopping for a mortgage. That really improves your chances of getting an accepted offer and an approved mortgage.