Mortgage Pre-Qualification: Pros & Cons

In this article series, we’ve already discussed getting pre-approved for a home purchase mortgage: a process which involves gathering definitive proof of income (W2s, 10-40s, pay stubs, etc.), credit / FICO score info, and employment verification for the purposes of expediting the loan process. We described pre-approval as being a “higher tier” form of qualification, as compared to a pre-qualification, which requires less verification. That said, "pre-qualification" can have great value when it comes to home shopping.

 

Pros:

 

By going through a pre-qualification process, your credit is pulled and you’re able to price up all aspects of your home purchase. This can help consumers avoid “sticker shock” - as Bankrate.com states, “Consumers can avoid sticker shock by going through this process, especially if they are buying their first home. The costs of owning a home can add up quickly and include more than the monthly mortgage payment...

 

Homeowners should also budget to pay for home insurance, property taxes, homeowners association fees and lawn maintenance.” These miscellaneous expenses should be on your mind to determine how much house you can really afford! It might be less than you think.

 

In addition to more cost info, pre-qualification proves to some sellers that you’re serious about buying. Even though your income is not verified, you’ve at least estimated your income, had your credit pulled, and likely worked with a loan origination company to do so. It’s not uncommon for home sellers to require pre-qualification for you to even view their property! They’d rather not waste their time showing a home to non-serious buyers.

 

Last, a pre-qualification could help align you with your own financial goals. Often times, pre-qualification leads borrowers to take easy steps to improve their FICO score, or start saving for a specific down payment. Loan officers can help advise on these issues as well. More information can never hurt!

 

Cons:

 

While it’s almost always recommended to pre-qualify, and get pre-approved (if possible), there are some cons to consider here…

 

First, if you have your credit pulled multiple times within 120 days, it can ding your credit score. Luckily, the same report can be used for multiple lenders to receive several quotes in that same time frame. With strategy, you should be able to keep your score from being unnecessarily lowered.

 

Another pre-qualification con to consider is that it might mislead you: Your own income estimate may be inaccurate! For a pre-approval, lenders require W2s, tax returns (10-40s), recent pay stubs, alimony, bonuses, dividend and interest income, etc. All of this is shown to a lender through a full, one month bank statement. Depending on the loan, you might also need extra reserves in your bank account to be pre-approved. Bankrate.com continues that, “A pre-qualification may give people a false sense of security if it did not include a thorough review of credit, income, and asset documentation.” Since pre-qualification is more a “shoot-from-the-hip” income estimate, you might get your hopes up for a home that you ultimately don’t qualify for.

 

Last for cons is that a pre-qualification might not be enough for sellers. It might get you in the door to see a home, but to truly be considered competitive among potential buyers, you’ll want a pre-approval.

 

As always, do consult with a loan officer prior to home shopping. If you’re interested in financing a home, more info is always a positive! To check rates any time without speaking to a loan officer, feel free to check out our live quote generator, or give Prospect Financial Group a call at 858-605-0952!

 

Jason Vondrak

Company President

Prospect Financial Group

948 Garnet Avenue

San Diego, CA 92109

NMLS: 349089 | BRE: 01837707

Jason Vondrak has been in the mortgage industry since 2004 and co-founded the mortgage brokerage Prospect Financial Group in 2006 in San Diego, California. Today he serves as President and CEO of Prospect Financial Group and the president and founder of Prospect Property Group, a real estate development company, established in 2012.

"I've had the privilege to serve in an industry that exists to ensure homeownership remains among the top priorities of government and citizens alike. Over the years, it has been a pleasure working alongside homeowners, real estate professionals, and business associates combining efforts and teaming up to help homeowners realize the dream of home ownership."