What does it mean to get “pre-qualified” for a home loan?
Actually most of the previous answers are incorrect. To be “pre-qualified” means you have a heartbeat. The banks/mortgage lender know you exist, know you have some type of income, and they want you to send in all of your personal information so they can see if you are even worth them wasting time on you. When you are “qualified” a bank has sent you a written letter specifying the loan they are willing to provide you. When you are “approved” you have discussed with the bank/lender on how much you need, they have verified the value of your investment and are willing to front the money for your purchase. If you make your purchase the terms of the loan will be in place and you will start payments on a designated date. There is some paperwork embedded in these descriptions and it IS a little more complicated, but that is the gist of it.
Being pre qualified means you have gone to the lender they pull you credit and tell you what kind of loan you are qualified for. You don’t actually have the loan yet. If anything changes in your credit file or your financial situation it could change the type of loan you would qualify for. Pre-approved means you are actually approved for a loan and as long as you find a home for the price you are approved for within the time allowed usually 90 days you are guaranteed the loan and rate approved for. Real estate agent like to see people that are pre approved because there is no chance of having problems with finance falling through when a offer is put on a house.
This is usually done before you start looking for a home. You go to the bank and the bank will tell you how much borrowing power you have, i.e. how much money you will probably be able to borrow based on your income, credit score and other factors. Then, you can look for homes in the price range for which you’ve been pre-qualified.
A “pre-qualification” letter from the bank has little value. You should get a “pre-approval” letter to show commitment from the bank to actually loan you the money. Bear in mind that the bank will conduct an appraisal of the house you plan to buy, and will only lend you the money if the price you’re paying for the house is close to the appraised value. So, even if the bank approves you for a $300K loan, if you’re paying $300K for a house but it only appraises for $280K the bank will most likely lend you 80% of $280, not $300K (if you are getting a regular, conforming loan).
Pre-qualification is done by a lending institution or a realtor to see how much you can afford to pay for a home. They will run a credit check and reference check and take a look at your debt ratio and then come up with an amount they feel comfortable that based upon that day you can afford to pay for a home. keep in mind that I said today. Tomorrow you may decide to buy a car on credit or open a charge account and that changes everything. I am of the opinion that pre-qualification is a farce and they always over rate it because they want to make more money off of getting you into a higher priced home that you will have to pay back the biggest part of your life to the bank.
