Mortgage prequalification is an informal evaluation of your creditworthiness and how much home you can afford. Prequalification indicates whether you meet minimum requirements for a loan and how big that loan may be. Prequalification is an important step for those who aren’t sure whether they’re financially ready for homeownership. If you’re confident in your finances or have already been pre-qualified, you might want to get preapproved instead.
Section: How we got here
What’s behind the calculation?
The debt-to-income ratio, or DTI, is a common formula lenders use for mortgage prequalification, and it comes in two varieties: front-end and back-end.
Your back-end DTI ratio, which provides the most accurate picture of money owed, is all your monthly debt divided by your gross monthly income. Conventional mortgage lenders generally prefer a back-end DTI ratio of 36% or less, but government-backed loan programs may allow a higher percentage.
NerdWallet’s prequalification calculator looks at back-end DTI while also considering other aspects of your credit profile, such as employment, credit score and down payment.
How to use the prequalification calculator
Our prequalification calculator can provide an idea of what to expect before you talk to a lender. All we need are a few pieces of information about you and your finances:
- Enter your annual income before taxes
- Enter the term of mortgage you’re considering
- Enter the interest rate for your mortgage type or use today’s mortgage rate
- Select your credit score range. (Not sure? Get your credit score for free.)
- Tell us about your employment status
- Tell us if you have a down payment saved up
- Tell us about past foreclosures or bankruptcy
- Enter your monthly recurring debt payments
After completing each required field, you’ll see the loan amount we recommend as well as a higher loan amount. We show two prequalification amounts because:
- Different loans have different DTI requirements. For example, conventional loans have different DTI requirements than FHA loans, issued by the Federal Housing Administration.
- It’s not always smart to borrow 100% of what a lender offers. The maximum loan amount is the absolute most your finances can handle, and if something suddenly changes — for instance, you lose your job or incur a big medical bill — you could find yourself in a tough spot.
How to prequalify for a larger loan amount
Don’t like the prequalification amount our calculator shows? You could prequalify for more if you:
- Improve your credit score: Three ways to do this quickly include correcting errors on your credit report, using less of your credit limit and paying bills on time and in full each month.
- Consolidate or pay off debts: If you have high-interest debt spread out over several credit cards, consolidating it will reduce your monthly debt payments. Eliminating debt completely, through larger or more frequent payments, is even better. Reducing expenses and following a budget will help.
- Increase your income: A higher gross income will improve your DTI ratio (especially if your debt stays the same) and may qualify you for a larger loan amount. You may be able to achieve this by asking for a raise or starting a side hustle.
Section: Prequalification 101
What is mortgage prequalification?
Prequalification is how lenders determine if you fit the basic financial criteria for a home loan.
To get prequalified, you tell a lender some basic information about your credit, debt, income, and assets, and they tell you how much you may be able to borrow. “Tell” is the key word here. The information used for prequalification is self-reported, which means the lender doesn’t verify it or look at your credit report.
How long does it take to get prequalified for a mortgage?
Because it’s an informal, nonbinding evaluation, you can get pre-qualified in a day or two, sometimes less. Depending on the lender, pre-qualification can happen in person, over the phone or online.
What’s the difference between prequalification and preapproval?
Unlike pre-qualification, preapproval requires proof of your debt, income, assets, credit score and history.
To get preapproved, you’ll supply documentation such as pay stubs, tax records and proof of assets. Once the lender verifies your financial information, which may take a few days, it should supply a preapproval letter you can show a real estate agent or seller to prove you’re ready and able to purchase a home.
Remember, prequalification doesn’t guarantee preapproval. You can still be turned down if your financial documents don’t support the numbers you reported.
More on mortgage prequalification:
Why prepapproval matters
Get preapproved for a mortgage
Difference between pre-qualification and preapproval