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 liability ...

by the lending institution. Typically,

subprime In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpr ...

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 ...

(LTV), what state the loan is in,

credit score A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report, information typically sourced from credit bu ...

, the purpose of the loan, whether or not the applicant is a first time home buyer, if the refinance has a " cash-out" amount requested, whether or not the applicant has had a

bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the deb ...

foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has Default (finance), stopped making payments to the lender by forcing the sale of the asset used as the Collateral (finance), coll ...

, 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.).

Basic process

Mortgage

See also

References

Further reading