Buying your first home. How does loan pre-qualification work?

What is prequalification?

To pre-qualify you for a loan, a lender calculates a loan amount you can receive based on information that you provide. Information includes your income, expenses and debts. If you add the earnings of a spouse or parent as a borrower, your pre-qualifying amount will be higher. Think of this as a preliminary estimate of the loan you might receive. If the information you provide is incomplete or inaccurate, the loan amount will change.


Your lender will use the information you provide to calculate your qualifying ratios. These ratios and any compensating factors will help determine which loan products and financing are best for your situation. Different loan types have different guidelines for qualifying ratios. Your lender usually will not recommend a loan product until you complete a loan application. However, once lenders determine qualification ratios, they have a preliminary idea of which loan types to recommend. Many lenders use automated electronic systems to help them pre-qualify borrowers for loans.

After reviewing the initial information you provide, a lender will try to get you pre-approved. To pre-approve you for a loan, a lender calculates the loan amount you can receive based on information that a third party provides. The lender verifies your information via a credit report. The credit reporting agency acts as a neutral third party. Consider this a firm estimate of a certain loan amount. Final approval depends on whether the property also meets requirements for a loan and that nothing changes, for the worse, from the initial information that you provided.   


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