Mortgage Prequalification is a Long Way From Approval

Mortgage prequalification. It sure sounds promising. You get prequalified for a home mortgage loan, and then it’s just a matter of finding the right house. Right? Wrong. In fact, nothing could be further from the truth. Here are seven things you should know about the mortgage prequalification process as it applies to you, the borrower.

Mortgage Prequalification at a Glance

As you proceed through the seven points below, you will get a sense of what prequalification is — and what it isn’t. It’s certainly not a guarantee that you will receive funding from the lender. Here’s what it is:

1. Mortgage prequalification is typically the first step in the home loan application process. It can be done online through the lender’s website, or in person at a branch office.
2. During the mortgage prequalification process, the lender will take a quick look at your financial situation. Then they will give you an estimate of how much you might be able to borrow, and possibly a rate quote as well.
3. “Cursory” is a good way to describe this process. The Oxford English Dictionary defines cursory as “passing rapidly over a thing or subject, so as to take no note of details.” I can think of no better way to describe the mortgage prequalification process.
4. Prequalification does not mean you’re actually approved for a loan. In fact, you can get prequalified without even having your credit checked, or your financial documents verified. It’s an informal process that merely gets the ball rolling. Informal and cursory — these are good words to keep in mind.
5. Mortgage prequalification is a great way for lenders to generate leads from potential borrowers. It gets the customer in the door, so to speak. But beyond that, it offers limited value to you as a borrower.
6. Home buyers often celebrate when they’ve been prequalified by a mortgage lender. But it’s really no cause for celebration. Keep the champagne on ice until you get a final approval from the lender, once your file has been labeled “clear to close” by the underwriter. Now that’s something worth celebrating.
7. Prequalification is also different from pre-approval. The former is a quick, cursory and informal review of your financial situation and your mortgage needs. The latter (pre-approval) is a more in-depth review of your credit, income, assets and debt. Here’s an article that explains the pre-approval process. It’s well worth a read.

These seven points can be summed up as follows:

Mortgage prequalification is a good way to get the ball rolling. But that’s about it. Lenders use this process for lead-generation purposes. They put a simple prequalification form on their website, asking for minimal information (such as the applicant’s name, address, phone number and estimated income). The borrower fills out the form. The borrower’s contact information is then stored in the lender’s contact management system or CRM. A loan officer or broker will then contact the borrower for more information.

The bottom line is this. You will not receive a final approval from the lender until you’ve been through the underwriting process. This is where the rubber meets the road — the moment of truth, so to speak. But this is a few more steps into the process.

Here’s how it usually works: prequalification and/or pre-approval >> application >> credit check >> document verification >> appraisal >> underwriting >> conditional approval >> conditions resolved >> final approval.

Notice the gap between mortgage prequalification and final approval. This is not meant to discourage you, but only to give you a realistic sense of how the process works.