In 2021, approximately 34% of those purchasing a home were first-time buyers. Securing the financing for a home is the primary obstacle most people face when trying to buy their first home. While this process may be intimidating, getting prequalified or pre-approved helps you better understand your purchasing budget and is usually a good indicator for actually qualifying for a mortgage. It also allows you to choose a home you can afford and alleviates some of the stress of waiting for the lender to approve your loan before you sign the dotted line.

Understand the Difference Between Prequalification and Preapproval

There are two possibilities for securing financing before you begin your house hunt. The first and simplest is prequalification. The second is preapproval. It’s a more involved process, but it may ultimately save you time and improve your chances of getting your desired house.

Prequalification

Prequalification is a nonbinding estimate of the loan amount a lender might be willing to extend you, including an estimated interest rate. The bank calculates these numbers from the information you provide without verifying it for accuracy.

Though you eventually need to submit documentation verifying your finances, obtaining prequalification gives you an idea of what you can realistically afford. You can narrow your choices to houses that fit your budget using your estimated loan amount.

Preapproval

Preapproval goes a step further. When you apply for preapproval, you must submit financial documentation and agree to a credit check. With prequalification, the lender provides an estimate based on self-reported information. With preapproval, the lender runs a hard credit check and verifies income and other financial statements.

Preapproval does not mean that the lender guarantees it will finance your mortgage. Final approval does not occur until you’ve made an offer that a seller accepts. At this stage, you will have to submit further documentation, some of it specific to the property you want to purchase.

Though getting a preapproval is not a guarantee, it gives you an advantage when making an offer. Completing a house sale is a lengthy process, and many sellers give preference to those with a preapproval letter from a lender. Some won’t even consider a buyer who isn’t preapproved.

Complete the Prequalification Process

If you go through the prequalification process, you should research lenders and mortgage types before you get started. Look for which companies offer the best interest rates for the mortgage you are interested in. You may also want to investigate what information you need to provide for prequalification.

After you choose a lender:

1. Get your credit report. Federal law allows you to order one free credit report annually. If you haven’t done so already, now is a good time to take advantage of this legal right. Be sure you request your report from AnnualCreditReport.com, the only website federally authorized to provide this service.

2. Gather financial information. You will need to provide information about your current financial status, so be sure you have your income information, bank statements and statements for any other financial sources.

3. Complete the application. Most of the time, you can complete the prequalification app right on the lender’s website.

4. Print your prequalification results. Use the prequalification results to guide you in searching for the right first home for you.

You don’t have to use the same lender when applying for your mortgage. Depending on how much time passes, you may be able to find better rates by the time you choose a home.

Get Preapproved for a Home Loan

Getting preapproved is helpful, particularly for first-time buyers. The process is similar to applying for prequalification, except that you need to submit financial documentation to the lender you use to apply for preapproval. You may need to make an appointment with a loan officer.

Specific requirements for preapproval vary based on loan type and lender guidelines. However, lenders generally make approval and loan amount decisions using the following:

• Proof of income through tax forms, W-2 forms or pay stubs

• Verification of reliable employment, a lengthier process for those who are self-employed

• Evidence of ability to pay the down payment

• A credit score that meets the standard for the type of loan you want

You will also need to provide documentation verifying your identity.

Know Your Options

There is more than one type of mortgage, and it’s essential to know your options as a first-time homebuyer. For many, Federal Housing Administrative loans are an attractive option. FHA loans make obtaining a mortgage easier for those just beginning their homebuying journey. Loan requirements for credit scores and down payments are lower for FHA loans than for conventional loans.

Conventional loans usually have 30-year terms, though you can find 15- and 20-year mortgages. They typically require a higher credit score and down payment than FHA loans. Fixed-rate and adjustable-rate loans are the most common. With a fixed-rate mortgage, your interest rate remains the same for the loan’s duration. Adjustable-rate loans have interest rates that fluctuate with market conditions.

The type of loan that works best for you depends on your specific financial situation and homebuying goals. Knowing each type's pros and cons is essential before applying for a loan. You can apply for preapproval for any of these loans with lenders that offer them.

Mortgage Financing FAQs

Often, first-time homebuyers have numerous questions about securing financing. Here are answers to some of the most frequently asked questions.

Is There a Difference Between Prequalification and Preapproval?

Yes. Both processes provide an estimate of how much you can borrow and what your interest rate might be. However, getting prequalified doesn’t require verification of finances, while preapproval does. Sellers often prefer preapproved buyers.

Do I Need To Get Prequalified for a Mortgage?

You do not need to get prequalified for a mortgage. However, doing so helps you understand the maximum price point you can afford, allowing you to eliminate homes out of your budget.

Can I Buy a Home Without a Preapproved Loan?

There is no legal requirement to obtain preapproval before you begin your home search. However, many sellers prefer interested buyers with a preapproval letter.

How Does Applying for Preapproval Impact My Credit?

If you apply for preapproval, the lender runs a hard credit check, lowering your credit score temporarily by up to five points. Applying for prequalification does not impact your credit.