"How much mortgage can I afford based on income?" is a common question I am asked. So if you're looking to buy a house and don't know how much you can afford, here are some helpful tips. Getting prequalified or preapproved for a loan is the easiest way to get your mortgage amount, but what is the difference between the two?
In order to get prequalified for a loan, you will need to tell the lender what debts you have and how much money you earn. The lender will take your personal financial information (income, debts, assets, etc.) and run them through a formula. The result is the amount of money you're qualified to borrow for a mortgage.
Pre-approval takes the same process a step further. You'll actually apply for the loan and the lender will approve your application with certain caveats. To get preapproved for a loan you may need to provide documentation for the lender. You may need to give the lender bank account statements, income tax forms or recent pay stubs.
The main difference between getting prequalified or preapproved for a loan is that when you get preapproved, the lender is actually committing in writing to funding your loan. When you get prequalified, there is no commitment from the lender. They will only crunch your numbers you give them and let you know the amount you can afford.
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