In general, to pre-qualify is about passing or meeting an initial criteria or requirements before getting other opportunities opened up to such a person.
Pre-qualification is a process whereby a loan officer takes information from a borrower and makes a tentative assessment of how much the lending institution is willing to lend them.
Basic process
The borrower is typically asked for their social security number or another identifier, together with proof of their employment, income, and assets, which is weighed against the monthly payments being made on their current debts. This provides a general picture of their creditworthiness. Based on this initial information, a maximum loan amount will be determined according to a standard Debt-to-income ratio (DTI). Final approval of the loan will require a credit report from a credit bureau
Mortgage
In a mortgage context, pre-qualification denotes a process that has not yet been
underwritten
Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabili ...
by the lending institution. Typically,
subprime lenders will allow 50% DTI. Common monthly debts used for calculating DTI are mortgage (or new mortgage payment), auto payment(s), minimum credit card payment(s), student loans, and any other common monthly or revolving debt that is on the applicant's credit bureau report. If a
refinance is involved, monthly debts that are being consolidated are not taken into consideration, because they are built into the DTI by way of the new loan amount payment.
Other factors included in determining the buyer's pre-qualification status, besides the basic DTI issue, are: monthly
gross disposable income, the number of open
credit lines the buyer has, and assets. Other factors that are important, because they may affect the rate of interest, which directly affects the DTI by changing the mortgage payment amount are property type, property use, property location,
loan-to-value ratio
The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased.
In Real estate, the term is commonly used by banks and building societies to represent the ratio of the first m ...
(LTV), what state the loan is in,
credit score, the purpose of the loan, whether or not the applicant is a first time home buyer, if the refinance has a "
cash-out
Cash out refinancing (in the case of real property) occurs when a loan is taken out on property already owned, and the loan amount is above and beyond the cost of transaction, payoff of existing liens, and related expenses.
Definition
Strictly spe ...
" amount requested, whether or not the applicant has had a
bankruptcy or
foreclosure, how many times the applicant has been late on a mortgage payment, the applicant's income type and the way the applicant will verify income (
W-2, tax returns, bank statements, etc.).
See also
*
Loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...
Further reading
* ''The Handbook of Real Estate Lending'', by Kathleen Sindell, Irwin Professional Pub. (c1996)
References
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Mortgage
Personal finance
Business terms