Important Facts on Mortgage Prequalification

Obtaining a mortgage prequalification is the single most important step to ensuring that you are seen as a serious contender for a piece of real property. Moreover, it provides you, the consumer, with the amount of money that a bank is willing to lend for the sake of obtaining a home. Going above and beyond this figure requires the consumer to make up the difference between the amounts arrived at during the prequalification period and the more expensive home the consumer has chosen. Real estate sellers look for bids from those who have gone through the trouble of becoming prequalified, in part because this provides some peace of mind with respect to not entering into a business relationship and open escrow when the transaction may actually not be finished. As such, prequalification benefits both the buyers and the sellers.

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There are some shortcomings associated with mortgage loan qualifications, however, which must be disclosed ahead of time. For example, a prequalification is not a loan guarantee. While the lender is making an educated guess based on information obtained from the would-be borrower and from the credit profile, there are times when a prequalified loan cannot be granted. This usually occurs when the borrower cannot verify income, length of employment, or eligibility to contract for such a large amount of money in the United States. This information does not usually show up on the credit report but is discovered after a prequalification letter is issued.

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Another problem with a prequalification letter is the fact that it is only applicable to the moment in time when the applicant requested it. Job losses, a change in professions, and also other factors may adversely affect a would-be borrower’s ability to qualify for the actual loan, prequalification letter or not. In the cases of troubled financial institutions, there is also the danger that a bank may not have the funds needed to follow though on the mortgage loan for which it prequalified a consumer, and while this is an exceedingly rare occurrence, recent economic turmoil shows that it can happen. Of course, if the applicant is a good credit risk, the prequalification letter may be honored by any of the bank’s competitors, and there is a chance that the real estate transaction will still go through.

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There are also other reasons that influence a real estate transaction, with or without a prequalification letter. For example, if the piece of real property fails to appraise at an amount that is close to the sale amount, then there is a good chance that the bank will refuse to fund such a loan. Generally speaking, a bank will fund a loan up to the amount of the real estate appraisal, but will not go beyond. If a consumer insists on purchasing a property that is sold for more than it is worth, s/he will have to come up with their own funding to make up the difference. This might discourage a good many consumers from pursuing the transaction, and thus escrow may still fall through, even though the would-be borrower presented a prequalification letter to the would-be seller.

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