What is Loan Prequalification?
Loan prequalification is a process that pre-approves a homebuyer for a specific loan amount when buying a home. To document the loan prequalification, the homebuyer receives a special letter from the lending institution or loan officer. A loan prequalification can support a home builder in the purchase of a home because it gives the buyer a clearer picture of how much money can be spent on home purchase. As a buyer with loan prequalification, homebuyer has the opportunity to negotiate a better price or a reasonable payment plan with the seller.
The loan prequalification process is simple.
For the first loan officer, the homebuyer asks several questions, some of which may require documented evidence. For example, the loan officer will ask homebuys to provide proof of income and debt in order to determine a debt to income ratio. To determine this relationship, the loan needs to know the homebuyer outstanding debt, assets, credit and employment conditions.
After assessing all this information, the loan officer is able to provide homebuys with an estimate of how much money he or she can spend against buying 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, especially if there are other buyers interested in the home who have not been pre-approved. In addition to helping the homebuys determine the amount of money that can be spent on buying a new home, a loan prequalification helps the homebuyer learn how much the monthly payments will be. The homebuyer can also decide how much of a prepayment is needed.
Before visiting a lending institution for loan prequalification, a homebuyer can take advantage of many online mortgage calculators. These mortgage calculators also allow to determine how much homebuyer can afford to take out a mortgage as well as how much monthly payments will be for specific mortgage amounts. Although information about these calculators is not as accurate as the information provided by a lender, it means giving the buyer a set number 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 tiring one, even though homebuyer income and credit history is impeccable.