What is prequalification?
Updated March 10, 2022
Prequalifying for a mortgage is one of the first steps that people take when preparing to finance the purchase of a home. Lenders look at a prospective buyer’s bank statements and credit score, and provide a ballpark estimate of how much they could borrow to purchase a property.
This is a good way for buyers to get a sense of what they can afford, as well as a clearer idea of what their options are for both lenders and types of mortgages. Buyers will also receive a prequalification letter to share with real estate agents and sellers to demonstrate they’re working with mortgage lenders. However, this letter does not guarantee that the lender will ultimately issue a loan, as it’s only an estimate of what a buyer could receive under ideal circumstances.
A preapproval, on the other hand, is considered a stronger indication of a buyer’s purchasing power. Buyers fill out a detailed application, and mortgage lenders conduct a more thorough review of their financial situation, looking at their assets, income, credit, liabilities, and employment information. The buyer will also share how much they’re willing and able to spend on a down payment, and the size of the loan they’re looking for.
Prequalifying for a mortgage is one of the first steps that people take when preparing to finance the purchase of a home. Photo: Pixabay
If all goes well, the lender will then issue the buyer a preapproval letter offering to lend them a specific amount of money at a particular interest rate. This letter is typically good for 90 days; the buyer will share the letter with their agent as well as the seller of any home they’re interested in.
Once a buyer’s offer on a home is accepted, they will decide which lender to work with; the loan is finalized at closing, after the home has been appraised.