What does it mean to be “Prequalified” and what is involved in getting prequalified?

This article is intended to give a better understanding of what it means to prequalify, the typical things needed to do so and how to avoid disaster due to an incorrectly done prequalification. It does not go into detail regarding what guidelines the banks have set in order for any one individual to become prequalified. Guidelines and requirements are changing constantly. But the basics to prequalifying have remained the same.

Getting prequalified for a home loan is the preliminary step to getting “Preapproved”. It is very important to define and understand the difference between the two. There have been many failed transactions, lost deposits and much heartbreak caused by not understanding the differences.

Although the criteria for a buyer’s qualifications has become more stringent in the last year (undoubtedly you’ve heard this in the news), the process of prequalifying is essentially unchanged. By the way, in some ways qualifying for a home loan has indeed become more difficult but in other ways it has gotten easier. This is primarily due to the dramatic dip in home prices and FHA financing returning to prominence.

Unless a buyer is paying cash for a property, at some point, hopefully very (very) early in the process, the buyer will need to seek out a source for a loan to cover the difference between their down payment and the remainder of the purchase price (and also possibly the closing costs). The buyer will work with a professional loan agent who could be a loan broker or in the employ of a direct lender. Here is an article explaining “The Differences between a Loan Broker Direct Lender”.

The initial consult is typically done over the telephone, via email or an online fill-in form. In my experience the most successful method is talking on the phone and then using email or online forms to convey the needed information or documents. The goal at this point it to determine the likelihood the buyer will qualify. If it is highly likely the buyer will qualify then they are for all intents and purposes “prequalified” at this time. If there are any “red flags” that look like they may prevent a buyer from becoming qualified then the loan agent can discuss these issues with the buyer and suggest a course of action to correct the issues or look for another option. The loan agent will want to gather some important, but as yet unconfirmed, and not highly detailed information. He or she will ask you questions regarding your income, job history, home ownership history (if any), credit record and assets/reserves, which are typically in the form of savings, retirement accounts or stocks & bonds. They will also ask for your permission to obtain a copy of your credit record. All of this basic information is usually entered into a computer program known as desktop underwriting. If the information entered falls within the prequalifying guidelines the buyer then becomes “Prequalified”. This is where the trouble usually begins.

As noted, the prequal process is a preliminary process done to determine the likelihood of a true approval. Being prequalified does not guarantee getting approved. Remember, the loan agent has not received any documentation from you, neither has he or she verified your employment and a number of other secondary factors that eventually make up a final approval. And at this point an actual human underwriter has not seen your application file. An underwriter will look at your file and account for a number of factors a computer could not bring into reason. For instance if you are buying a home that is 100 miles away from your place of employment, the underwriter is going to question the reasoning for this. So, as you can see, getting truly approved or “Preapproved” is a much more detailed and in depth process then prequalifying. A loan agent can “grant a prequalification letter” after talking with a buyer for just a few minutes and reviewing their credit record. The sad truth is many prequalified buyers never eventually get approved.
When a loan agent tells a buyer he or she is “Prequalified” after less than a day’s work on the file and then tells that buyer to go find a house to buy, trouble and heartbreak are sure to follow. On the other hand if a loan agent issues a prequalification letter after verifying the needed criteria (which typically takes 2-10 days) and then tells the buyer they are safe to go shopping for a home, there is a much greater chance for success in getting final approval. So why would a loan agent want a buyer to enter into a contract to purchase a home before they are truly ready? The answer in most cases is because doing so usually causes the buyer to become committed to that loan agent at that point. Then, and only then, the loan agent has a sense of urgency to get the buyer truly qualified. Many times qualifying roadblocks pop up and then they learn the buyer cannot get the final approval needed. The sad and angry part of this scenario is that the buyer is the one incurring the risk. The buyer risks losing their good faith deposit not to mention losing a home they have set their hearts on.

What’s the best way to prevent this from happening? First, be patient. It is foolhardy and dangerous to expect to call a loan agent in the morning and be “Prequalified” well enough to go shopping for homes that afternoon. A strong and reliable prequalification takes a little time and saves a lot of trouble. Give the loan agent enough time to submit your file to processor so that they can get a set of approval conditions. Then you will know exactly what final conditions you must meet to gain final approval. Second, work with a trusted loan agent. How do you know if they are trusted? Ask around and ask the loan agent for referrals or testimonials. Third, be very honest and forward during the initial consultation. If you embellish or mislead in any way it will eventually come out and usually at the worst possible time. Don’t be afraid to be “turned down” the first time around. You will gain valuable knowledge about just what you need to do in order to get prequalified the next time. In many cases a buyer can correct issues in just weeks or months.
Getting “Prequalified” is the first step, but only the first step. When done correctly it is a very exciting step to home ownership. Take your time in this stage and the rest will go smoothly. Very soon you’ll be a home owner.