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What Is Prequalification?

The term “prequalification” refers to a process where a lender uses the information provided by a borrower to determine whether they can pay back and estimate how much loan they are likely to receive.

Deeper Definition 

Prequalification is prominent in the world of real estate. When you prequalify a home loan, you are getting an estimate of what you might be able to borrow. This is based on the information you provide about your finances, as well as a credit check. It also allows you to learn more about different mortgage options and work with your lender to identify the right fit for your needs.

The application process for prequalification depends on the lender. Still, in most cases, you must provide income information. This could be a credit check, basic information about bank accounts, down payment amount, and desired mortgage amount. However, no tax information is needed.

Most first-time buyers find prequalification helpful because it gives them an insight into what loan matches their financial capability. However, prequalification has its pros and cons.

The pros are:

  • When a lender reviews your creditworthiness based on the information you have provided, they estimate how much you may be able to borrow.
  • It gives you a sense of financial readiness and introduces you to various mortgage options.
  • Getting prequalified puts you in a stronger position because most lenders wouldn’t want to waste their time reviewing the information of an unserious buyer.

The cons are:

  • Getting prequalified does not guarantee you a loan and can shatter your hopes.
  • Getting prequalified multiple times over a long period can affect your credit score.

Prequalification Example

Jane just got divorced and wants to buy a home. She decides to take a mortgage loan from a financial institution since her savings cannot cover the cost of the house. However, before the financial institution grants her a loan, Jane needs to prequalify. To do that, Jane will provide them with some information, including how much income she earns. After her details get reviewed by the lender, Jane will know whether she will get a loan and an estimate of the amount.

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