What does “pre-qualify” mean in terms of a mortgage?
The term “pre-qualify” does not have a standard definition. In some cases, a “pre-qualification” with Lender Jones is the same thing as a “pro-approval” with Lender Smith — but only sometimes.
In general terms, a “pre-qualification” means a lender feels you can borrow a given amount under the rules for a particular loan program.
You want to pre-qualify before you enter the marketplace so you know how much house you can afford.
If you pre-qualify with a lender you do not have to use that lender.
Traditionally, some lenders charge to pre-qualify, most have not. As of January 1, 2010, lenders may not charge for the act of taking a loan application though they may charge for the cost of a credit report, thus there should be no expense for a pre-qualification letter.
In a pre-qualification, lenders will look at your income, debts, available cash, and credit. Many lenders will run a credit check as part of the pre-qualification process.
A lender will then provide a pre-qualification letter showing how much it is believed that you can borrow. Most pre-qualification letters are NOT absolute loan commitments, but instead show that you have spoken with a lender and now have a reasonable estimate of your borrowing ability.
The pre-qualification process helps buyers better understand what they can afford, and it also helps in the negotiating process. Show the seller a pre-qualification letter and it’s clear that you have a reasonable ability to finance a given level of debt.
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