What does "Prequalification" mean?

Definition

Prequalification is a quick, initial estimate from a lender about how much you could borrow. It's based on a brief review of your financial information and is not as reliable as a preapproval.

Understanding Prequalification Steps

Early in the home-buying journey, prequalification gives a general idea of what loan amount you might qualify for based on basic financial details. In simple terms, you provide information about your income, debts, and assets. The lender then gives an estimate of your borrowing power. Example: If you earn $60,000 a year, have $5,000 in monthly debts, a lender might prequalify you for a $200,000 mortgage. It's not a promise of a loan or a final decision. It doesn't require detailed documentation or a credit check, so it's just an initial step.

People Want To Know

How much income do you need to be approved for a $400,000 mortgage?

Lenders typically require an annual income of $100,000 to $120,000 to qualify for a $400,000 mortgage. This estimate assumes a 20% down payment and a debt-to-income ratio of 28%. Additional factors, such as interest rates and other monthly debts, will affect the precise income needed.

How much is $100,000 mortgage at 6% for 30 years?

For a $100,000 mortgage at 6% interest over 30 years, the monthly payment would be approximately $599.55. Over the life of the loan, you would pay about $115,743 in interest, making the total repayment amount approximately $215,743.

Is it worth getting prequalified for a mortgage?

Yes, getting prequalified for a mortgage can be beneficial. It provides a quick estimate of how much you could borrow based on a brief review of your financial information. This initial assessment helps you gauge your budget and strengthens your position when making offers on homes. However, it is less reliable than a preapproval, which requires a more thorough evaluation.

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More From The Mortgage Glossary

Prime rate

The prime rate is a benchmark interest rate that banks use to set their lending rates. It’s generally the lowest rate offered to borrowers with the best credit.

Principal

The principal is the original amount of money you borrow for a loan. Your monthly payments go toward reducing this balance, along with paying the interest.

Principal, interest, taxes, and insurance (PITI)

PITI is an acronym that stands for Principal, Interest, Taxes, and Insurance. These four components make up your total monthly mortgage payment and are used by lenders to assess your ability to repay the loan.