If you own a home, you probably have been through this process yourself. But what does being prequalified really mean? A prequalification is a basic screening for a potential borrower. It however is not a mortgage application. It can help rule out some people who want to buy your home but cannot due to their credit, income, or debt.
A prequalified buyer means a licensed mortgage officer has reviewed the borrower’s credit for red flags and verified the borrower has met minimum score requirements. They also use the debt listed on the borrower’s credit report and annual income to determine if they meet the established ratios for the specific mortgage program, rate, and terms. These are what determine how much they can potentially borrow.
A prequalification is great first step but no guarantee. Sometimes borrowers initially include overtime or other income that lender will not count. Sometimes they do not provide full disclosure because they do not understand why a certain detail is relevant. Sometimes a mortgage officer will notice a detail they missed the more detailed formal mortgage application.
As a seller things can happen that are out of you or your agents control. However, requiring a prequalification letter from a reputable lender is a good way to gauge a borrower’s ability to close the loan. If you are considering a cash deal, you should obtain a verification of funds.