Prequalify

Definition: Prequalify

Prequalify is the initial step in the mortgage application process, usually executed by a lender to see if a borrower qualifies for a loan. During this step, a financial picture of the borrower is created based on self-reported data regarding income and assets.

The prequalification process helps potential homebuyers to understand how much they might be able to borrow from a lender. Unlike pre-approval, prequalification does not involve deep scrutiny such as reviewing credit history or detailed financials. Therefore, it serves more as an estimate rather than an actual lending commitment.

Examples

Example 1

Paul’s income is sufficient to prequalify for a $250,000 loan according to the guidelines used for conventional loans. Because Paul also can raise $50,000 for a down payment, he can look at homes costing up to $300,000.

Example 2

Sarah prequalifies for a $200,000 mortgage based on her stable employment and relatively good income. With an additional $20,000 available for a down payment, Sarah can look into buying properties up to $220,000.

Frequently Asked Questions (FAQs)

What is the difference between prequalifying and pre-approval?

Prequalifying refers to an initial assessment of a borrower’s ability to secure a loan based mainly on self-reported information. Pre-approval, on the other hand, involves a detailed analysis of financial activities, credit reports, and often results in a conditional commitment for a loan from the lender.

How long does the prequalification process take?

The prequalification process is generally quick and can be completed in a few minutes or hours, depending on the lender and the thoroughness of the information provided by the borrower.

Does prequalifying affect credit scores?

Typically, prequalifying itself does not affect credit scores as it usually doesn’t involve a hard credit check. Most lenders perform a soft inquiry, which gives a cursory glance at the borrower’s credit.

Can prequalification guarantee a loan?

Prequalification does not guarantee a loan. It offers an assessment based on preliminary information and does not delve into the detailed approval criteria that can affect the final loan decision.

Do I need to pay for prequalifying?

Most lenders offer the prequalification service free of charge. It serves as an incentive to attract potential mortgage customers.

Pre-Approval

Pre-Approval is an advanced stage beyond prequalification involving formal checks such as credit reports and verifiable financial disclosures. A pre-approval status shows that a lender is willing to offer a specified loan amount based on creditworthiness.

Loan-to-Value (LTV) Ratio

A ratio used in lending that measures the amount of loan relative to the appraised value of the property. Lower LTV ratios are typically seen as less risky by lenders.

Down Payment

An upfront payment made by the buyer towards the purchase price of a home. Larger down payments typically reduce the loan amount and can result in better loan terms.

Conventional Loan

A type of mortgage that is not insured or guaranteed by the government, such as an FHA or VA loan, and adheres to the guidelines of Fannie Mae and Freddie Mac.

Online Resources

References

NerdWallet. “How to Get Pre-Approved for a Mortgage.” Available at NerdWallet
Zillow. “Mortgage Prequalification vs. Pre-Approval”. Available at Zillow

Suggested Books for Further Study

“Home Buying Kit For Dummies” by Eric Tyson & Ray Brown
- An extensive guide that covers all steps necessary to buy a home, including prequalifying and pre-approval.
“The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls, Second Edition” by Jack Guttentag
- A comprehensive reference providing detailed information on various aspects of mortgages.
“The First Time Homeowner’s Handbook” by Atlantic Publishing Co.
- This book delves into the real estate market and covers essential topics for first-time homebuyers.

Real Estate Basics: Prequalify Fundamentals Quiz

### Is prequalifying a guaranteed loan offer? - [ ] Yes, it means you are guaranteed to get a loan. - [x] No, it is merely an estimate. - [ ] Yes, provided that you maintain your financial status. - [ ] Sometimes, depending on the lender. > **Explanation:** Prequalifying is an initial estimate based on preliminarily reviewed or self-reported financial information and does not guarantee a loan offer. ### Does prequalifying involve a deep financial check? - [ ] Yes, it includes a full financial inspection. - [x] No, it is based on basic financial information. - [ ] Only if requested by the lender. - [ ] Yes, but for a limited account overview. > **Explanation:** Prequalifying typically involves a cursory review using basic financial data, unlike the pre-approval process which involves detailed financial scrutiny. ### How does a prequalification affect a borrower’s credit score? - [x] It usually doesn't affect credit scores. - [ ] It can lower your credit score by several points. - [ ] It can improve your credit score if approved. - [ ] It prevents credit checks for other loans. > **Explanation:** Prequalification primarily involves a soft credit inquiry which doesn’t impact a borrower’s credit score. ### What information is primarily considered during prequalification? - [x] Income and available assets - [ ] Detailed credit history - [ ] Employment history and credit score - [ ] Past loan defaults and bankruptcy orders > **Explanation:** The key information generally reviewed during the prequalification process includes the borrower’s income and available liquid assets. ### Can prequalification help homebuyers determine their budget? - [x] Yes, it helps establish an upper budget limit. - [ ] No, it doesn't provide financial guidance. - [ ] Only for buyers with approved loans. - [ ] Yes, but only if used with pre-approval. > **Explanation:** Prequalification is valuable in giving homebuyers an estimate of how much they might be able to spend on a property based their financial situation. ### Does prequalification involve obligating the buyer to a specific lender? - [ ] Yes, it ties the buyer to that lender. - [ ] Sometimes, based on certain agreements. - [x] No, it does not involve any commitments. - [ ] It depends on the type of loan program. > **Explanation:** Prequalifying does not obligate the buyer to commit to a specific lender or financing options. ### Who typically provides the prequalification estimate? - [ ] Real estate agents - [ ] Financial advisors - [x] Lenders or mortgage brokers - [ ] Tax consultants > **Explanation:** Lenders or mortgage brokers typically provide prequalification estimates based on basic financial data. ### What is the primary purpose of prequalification in the home buying process? - [ ] To close a property deal immediately. - [ ] To submit an offer to a home seller. - [x] To estimate a buyer's affordability range. - [ ] To confirm a buyer's financial commitment. > **Explanation:** The main purpose of prequalification is to estimate how much a buyer might be able to afford, helping them understand their property price range. ### Is a down payment necessary for prequalification? - [ ] Yes, you must provide the full down payment amount. - [x] No, down payment considerations come later. - [ ] Yes, for initial verification. - [ ] Only for pre-approval procedures. > **Explanation:** Prequalification focuses primarily on income and assets, and down payment determinations generally follow later during pre-approval or final loan arrangements. ### How fast can the prequalification process typically be completed? - [ ] Several weeks. - [ ] One business month. - [ ] Around a few days. - [x] Within a few minutes or hours. > **Explanation:** Prequalification processes are streamlined and can often be completed quickly, usually within a few minutes or hours, depending on the efficiency of the lender.