Obtaining a mortgage is an essential part of the home buying process, and pre-qualification can be an easy first step. Being pre-qualified streamlines the home buying process and gives you an idea of how much banks may be willing to lend you. Here is what you need to know about getting pre-qualified for a mortgage:

What Does Pre-Qualified Mean?

Pre-qualification is the first step in the mortgage process. It’s an informal process that evaluates your debt, income, and assets based on self-reported details. Based on these details, pre-qualification gives you an initial estimate of how much you may be able to borrow. It is not a guarantee that you will be approved for a mortgage, but it can give you an idea of your purchasing power.

How Is Pre-Qualification Different from Pre-Approval?

Pre-approval, on the other hand, verifies the financial details you provide in pre-qualification; it is a more formal process that involves a hard credit pull. With pre-approval, the bank reviews your financial information and determines how much they are willing to lend you. Pre-approval is a stronger commitment from the lender, and it can make offers more attractive to sellers.

Does It Affect Your Credit Score?

Pre-qualification does not affect your credit score. The lender will ask for some basic financial information, but they won’t pull your credit report. However, pre-approval does involve a credit check, which can affect your credit score.

How to Calculate Your Debt-to-Income Ratio

One essential factor in determining how much you can borrow is your debt-to-income (DTI) ratio. To calculate your DTI ratio, first, add up your monthly debt payments. This should include all credit cards, car, personal loans, and tuition payments. Take your total monthly debt payment and divide it by your gross monthly income. Your DTI ratio should be below 43% to qualify for most mortgages.

What Are the Next Steps After Getting Pre-Qualified?

After getting pre-qualified, the next step is to find a lender and complete the mortgage application process. Your lender will review your financial information and determine if you meet their lending criteria. Once you are approved, you can house hunt with confidence, knowing you are ready to make an offer.

If you’re still hesitant about reaching out to a lender, there are numerous online resources available to help you estimate the amount you may pre-qualify for. By obtaining pre-qualification, you can assess the approximate amount of money that a lender may offer you toward your home purchase. This simple and vital step can help you determine your budget and kick-start your home buying journey!