Mortgages 102: Qualification

Mortgage qualification is a process where a lending institution will provide you with an estimate or guarantee of financing. Qualification comes in three tiers: not qualified, prequalified, and preapproved. Each successive tier is better than the previous.

Not Qualified

A lender is responsible for qualifying you for a mortgage. If you have not yet spoken to a lender then you are not yet qualified. The first step an unqualified buyer should take when starting the journey of buying a new home is getting qualified. Sellers are unlikely to accept an offer from a noncash buyer who is unqualified. The reason is simple, there is no guarantee for the sellers that the buyer will be able to receive a mortgage. The only time a home buyer can skip getting qualified is when they will pay in cash.

Prequalified

A letter of prequalification is given to buyers who submit information about their income, expenses, and debt to a lender. The lender will use the provided information to give an estimate of mortgage value the buyer is eligible for. It is important to note that the lender does not validate the information provided, and the lender does not guarantee that the buyer can receive a mortgage specified in the prequalification letter. Prequalification is better than not being qualified, but sellers are still reluctant to accept a buyers’ offer when they are only prequalified.

Preapproved

This is the best option for all homebuyers. Preapproval takes prequalification to the next level. The lender will verify all information provided to them by a homebuyer. Once all information is verified the lender will issue a preapproval letter that acts as a guarantee of mortgage up to the specified amount. The lender may also provide a fixed interest rate—rate locking—along with the preapproval letter. Make sure to read the fine print to see if the interest rate is locked or just the daily rate.

Preapproval is the best option for both buyers and sellers because it provides buyers with a clear limit to the price they can pay for a home, and it gives sellers certainty that the buyer can acquire a mortgage. However, buyers should remember that preapproval letters come with multiple restrictions. First, they tend to expire after 90 days. Secondly, preapproval letters are no longer valid if the homebuyer becomes unemployed or experiences significant increases in debt.