What is a Mortgage Pre-Qualification?

Question #3 from How to Get a Mortgage During & After the Subprime Crisis

A mortgage pre-qualification is a document from a lender outlining how much of a mortgage a home purchaser can qualify for. A loan officer asks questions which would be essential in underwriting the mortgage, analyzes the information, and drafts a pre-qualification letter.

The Real Deal: Many realtors refuse to show a prospective buyer a home until he or she is pre-qualified. Why? Because time is money--and most people don't have a lot of either one!

Paula Prospect calls Rebecca Realtor to see a $375,000 condo. Rebecca agrees and they drive 15 miles to Condo Paradise Estates. Paula is excited by what she sees and immediately wants to make an offer. Rebecca says we can't make an offer until we have a pre-qualification letter. Paula calls Ben Banker to get pre-qualified. Ben says, "Sorry, Paula, but I can only pre-qualify you for a $325,000 purchase. Don't be foolish and try to go beyond that amount!" At that point, Paula and Rebecca realize they've wasted a lot of energy and the one thing they can never get back--time.

The real deal is that it's ridiculous to shop for a home you can't afford. I've known plenty of realtors who have chaperoned prospective purchasers all around town, without a pre-qualification, only to find, to their chagrin, that the prospects have stinky credit, shaky income, or no money at all for a down payment.

Also, sellers determine which offer they will accept, based on the financial strength of the purchaser. If two equal offers come in, but one has a stronger pre-qualification, the intelligent seller will accept the offer with the stronger pre-qualification. Stronger in this sense may mean better credit, a larger down payment or a superior mortgage product (prime as opposed to subprime). No one wants to waste time, money and energy working on a deal that is either a pain in the neck to process or simply can't be closed.

On the other hand, mortgage pre-qualifications can be completely bogus. The loan officer relies on the representations of the prospective purchaser regarding income and assets. The credit report stands on its own two legs once it is run, although there may be mistakes on it! But oftentimes a prospective buyer says he makes $60,000 per year when it's really closer to $55,000. (By the way, do you know your exact income?) Or he says he has 10% for a down payment when it's closer to 8%. Those two misrepresentations, among others, could make or break a deal.

One of the big problems with the mortgage pre-qualification process is that many loan officers get a wee bit overzealous, telling Paula Prospect she can afford a little more home than she really can. Loan officers might do this because the truth hurts and telling Paula what she wants to hear keeps her happy. However, many deals have been killed because Ursula Underwriter does not quite agree with Ben Banker's assessment of Paula's purchasing power. Ursula smacks the deal down and, of course, even more time, energy and money is wasted.

The Bottom Line: The mortgage pre-qualification is essential to determine how much home you can afford. That being said, if a lender says you're pre-qualified for a mortgage of "X" amount, that doesn't guarantee that you will close the deal. You still must go through the underwriting process.

Copyright by Kirk Charles, 2009. Please do not reprint or redistribute without written consent of Kirk Charles.