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Understanding prequalification vs. pre-approval


Usually, some type of pre-qualification is done in the first interview with a lender. Here you will provide basic information needed to help you obtain a loan.

The lender makes preliminary calculations based on information you give about your income, debts, and assets. These calculations help determine whether you can afford the loan you would like or how much you can afford to borrow. The lender may also explain the application process and steps to getting a mortgage at that company.

Prequalification occurs before the formal application is signed and submitted. At this time, lenders do not verify the information you give them, and they may not check your credit. Lenders are not committed to make a loan for you at this time. Prequalification is just an estimate of the amount you may qualify to borrow. You can use this preliminary information to assess the impact a particular monthly payment may have on your total budget.

In a pre-approval, lenders do check the accuracy of the information provided. They may contact the employer to verify employment dates and income and check your credit. If the information checks out and your credit is good, the lender will give you a pre-approval letter for a specific loan amount. You can be pre-approved by more than one lender. At this point, you are on the way to buying a home.

The pre-approval letter shows the real estate professional and home sellers that you are serious about buying a home, that your credit is good, and that you are working with a lender or lenders who will provide you with a loan. The pre-approval is specific to each lender but can be helpful in shopping with other lenders. Source:

Your Loan in the Valley




Before house-hunting ever begins, it is good to know just how much house the borrower can afford. By planning ahead, time will be saved in the long run and applying for loans that may be turned down and bidding on properties that cannot be obtained are avoided. Know what banks are the best ones to determine individual eligibility is very helpful information needed before even looking for a home.

a. How Much House Can I Afford?

The old formula that was used to determine how much a borrower could afford was about three times the gross annual income. However, this formula has proven to not always be reliable. It is safer and more realistic to look at the individual budget and figure out how much money there is to spare and what the monthly payments on a new house will be. When figuring out what kind of mortgage payment one can afford, other factors such as taxes maintenance, insurance, and other expenses should be factored. Usually, lenders want borrowers having monthly payments exceeding more than 28% to 44% of the borrower’s monthly income. For those who have excellent credit, the lender may allow the payments to exceed 44%. To aid in this determination, banks have mortgage calculators on their websites to assist in determining the mortgage payment that one can afford.

b. Check Your Credit History Thoroughly

Lenders like to look at credit histories through a request to credit bureaus to make the borrower’s credit file available. This allows the lender to make a more informed decision regarding loan prequalification. Through the credit report, lenders acquire the borrower’s credit score, also called the FICO score and this information can be acquired from the major credit bureaus TransUnion, Experiean, and Equifax. The FICO score represents the statistical summary of data contained within the credit report. It includes bill payment history and the number of outstanding debts in comparison to the borrower’s income.

The higher the borrower’s credit score, the easier it is to obtain a loan or to pre-qualify for a mortgage. If the borrower routinely pays bills late, then a lower credit score is expected. A lower score may persuade the lender to reject the application, require a large down payment, or assess a high interest rate in order to reduce the risk they are taking on the borrower.

c. Mortgage Loan Preapproval and Loan Prequalification

After basic calculations have been done and a financial statement has been completed, the borrower can ask the lender for a prequalification letter. What the prequalification letter states is that loan approval is likely based on credit history and income. Prequalifying lets the borrower know exactly how much can be borrowed and how much will be needed for a down payment.

However, prequalification may not be sufficient in some situations. The borrower wants to be preapproved because it means that a specific loan amount is guaranteed. It is more binding and it means the lender has already performed a credit check and evaluated the financial situation, rather than rely on the borrowers own statements like what is done in prequalification. Preapproval means the lender will actually loan the money after an appraisal of the property and a purchase contract and title report has been drawn up.

d. How Lenders Determine How Much Mortgage You Qualify For

There are two simple ratios that lenders use to determine how much to pre-approve a borrower for. Here’s how these ratios are calculated:

Ratio #1: Total monthly housing costs compared to total monthly income

  • The borrower should write down, before deductions, the total gross amount received per month.
  • The number in step 1 should be multiplied by .28. This is what most lenders will use as a guide to what the total housing costs are for the borrower. Depending on the percentage, a higher percentage may be used.

Ratio #2: Debt to income

  • The borrower writes down all monthly payments that extend beyond 11 months into the future. These can be installment loans, car loans, credit card payments, etc.
  • The resulting number in the first step should be multiplied by .35. Total monthly debt should not exceed the resulting number.

e. Credit and Mortgage Loan Qualification

When qualifying for a mortgage, credit plays a very important role. Here are questions a lender will more than likely ask:

  • Is the credit score of the borrower considered to be good?
  • Does the borrower have bankruptcy, late payments, or collections? If so, is there an explanation?
  • Are there excessive monthly payments?
  • Are credit cards maxed out?

The answers to these questions can make a determination as far as the eligibility of a mortgage loan goes.

f. Collateral and Mortgage Loan Qualification

If the loan would exceed the amount the property is worth, the lender will not loan the money. If the appraisal shows the property is worth less than the offer, the terms can sometimes be negotiated with the seller and the real estate agent representing the seller.

Sometimes a borrower may even pay the difference between the loan and the sales price if they agree to purchase the home at the price that was originally offered to them. To do such a thing, the borrower needs to have disposable cash and should ask the question of whether or not the property is likely to hold its value. The borrower must also consider the type of loan they qualify for. If the borrower would need to move suddenly and the loan is larger than the value of the property, the loan can be a very difficult thing to pay off.


Your Loan in the Valley