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What is Loan Prequalification?

By Shannon Kietzman
Updated: May 16, 2024

Loan prequalification is a process that pre-approves a homebuyer for a specific loan amount when purchasing a home. To document the loan prequalification, the homebuyer receives a special letter from the lending institution or loan officer. A loan prequalification can aid a homebuyer in the purchase of a home because it gives the buyer a clearer picture of how much money can be spent toward the purchase of the home. As a buyer with loan prequalification, the homebuyer has the option of negotiating a better price or a reasonable payment plan with the seller.

The loan prequalification process is a simple one. First, the loan officer asks the homebuyer several questions, some of which may require documented proof. For example, the loan officer will ask the homebuyer to provide proof of income and debt in order to determine a debt to income ratio. In order to determine this ratio, the loan officer needs to know the homebuyer's outstanding debts, assets, credit, and employment status.

After evaluating all of this information, the loan officer is able to provide the homebuyer with an estimate of how much money he or she can spend toward the purchase of a new home. With a loan prequalification letter from a lending institution, a buyer has a greater chance of getting the house he or she wants, particularly if there are other buyers interested in the home who have not been preapproved. In addition to helping the homebuyer determine the amount of money that can be spent toward the purchase of a new home, a loan prequalification helps the homebuyer learn how much the monthly installment payments will be. The homebuyer can also decide how much of a down payment is necessary.

Before visiting a lending institution for loan prequalification, a homebuyer can take advantage of numerous online mortgage calculators. These mortgage calculators also make it possible to determine how much the homebuyer can afford to take out in a mortgage loan, as well as how much monthly payments will be for specific mortgage loan amounts. Although the information on these calculators is not as accurate as the information provided by a lender, it does provide the buyer with a ballpark figure before visiting the lender.

As valuable as loan prequalification letters can be, they are not a guarantee of a loan. The actual loan approval process is a long and sometimes tedious one, even if the homebuyer’s income and credit history is impeccable.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By anon348560 — On Sep 18, 2013

I've been on housing 18 years and now I'm ready to purchase a new home with a town house in the top and bottom area with a 3 tier window frame that has a clear window on the outside with three other apartments, located alongside.

By Crispety — On Oct 10, 2010

Subway11-I know that you can look at Bank Rate for the best home loan prequalification calculator. It really lets you adjust the interest rate along with the down payment and purchase price. At least this gives you a snap shot as to what you might be able to afford.

By subway11 — On Oct 10, 2010

Bhutan-FHA home loans are actually the easiest to qualify for. You can get a loan with only zero to three percent down and offer a lower private mortgage insurance rate.

FHA loan prequalification can get you in your home fast because the qualifying standards are lower. You might even get up to 6% of your closing costs paid by the seller where as with a traditional mortgage the maximum would be 3%.

You might even be able to pick up a Fannie Mae home. Fannie Mae offers a program called Home Path Financing in which those that qualify can buy these bank owned home for 3% down payment and no private mortgage insurance because Fannie Mae backs these loans.

In addition, these homes are usually competitively priced and often a Home Path Renovation mortgage option is available and is a loan that can be tacked on to the mortgage in order to make repairs on the home.

By Bhutan — On Oct 10, 2010

Suntan12-Sometimes refinancing loans makes sense if you have a higher interest rate than the current market rate. Refinancing a mortgage requires a full closing which is a percentage of the loan amount.

This can be costly and may not be worth it if you will only save half of a point. However, if you plan on staying in your home for a while and are quoted at least a point lower than you are currently paying then it might be worthwhile. Sometimes refinancing can save a few hundred dollars a month which really frees up some money for your budget.

By suntan12 — On Oct 10, 2010

A mortgage loan prequalification looks at your credit profile, your income, and the amount of money that you are putting down on the home. A pre approval mortgage or prequalification home loan is important for a number of reasons.

First, it tells realtors that you are serious about finding a home and therefore they will in turn be more receptive.

In addition, should you find a home that would like to purchase the loans prequalify might put you ahead of other buyers if there are multiple offers on a property.

This happens a lot with distressed sales such as foreclosures. If you do not have your mortgage prequalification in place a bank may not even consider your offer. The banks want to sell the homes quickly and want to work with ready buyers who are loan prequalified.

By anon39041 — On Jul 29, 2009

great post...I like it thanks

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