Loan pre-qualification is a process that pre-qualifies a home buyer for a specific loan amount for purchasing a home. A pre-qualification letter is a document the the home buyer receives from a lending institution as to the amount available to them in purchasing a home.
The loan pre-qualification process rather easy. A loan officer asks the home buyer several questions in determining DTI "debt to income" ratio, some documentation may be required. The home buyer will need to provide proof of income and show all debt. In order to determine this ratio, the loan officer needs to know the home buyers: debt, assets, credit, and employment status.
After the information is evaluated, the loan officer is able to provide the home buyer with an estimated budget for the purchase of a new home. With a loan pre-qualification letter from a lending institution, a buyer has a greater chance of getting the house he or she wants, particularly if there are other buyers interested in the home who have not been pre-approved. In addition to helping the home buyer determine the amount of money that can be spent toward the purchase of a new home, a loan pre-qualification give a general idea as to how much the monthly payments will be. The home buyer can also decide how much of a down payment is necessary.
As valuable as loan pre-qualification letters can be, they are not a guarantee of a loan. The actual loan approval process is a long and sometimes tedious process, even for A paper borrowers.
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