Loan prequalification is a process that pre-approves a homebuyer for a specific loan amount when purchasing a home. To document the loan prequalification, the homebuyer receives a special letter from the lending institution or loan officer. A loan prequalification can assist a homebuyer in the purchase of a home because it gives the buyer a clearer picture of how much money can be spent toward the purchase of the home. As a buyer with loan prequalification, the homebuyer has the option of negotiating a better price or a reasonable payment plan with the seller.

The loan prequalification process is a simple one. First, the loan officer asks the homebuyer several questions, some of which may require documented proof. For example, the loan officer will ask the homebuyer to provide proof of income and debt in order to determine a debt to income ratio. In order to determine this ratio, the loan officer needs to know the homebuyer's outstanding debts, assets, credit, and employment status.

After evaluating all of this information, the loan officer is able to provide the homebuyer with an estimate of how much money he or she can spend toward the purchase of a new home. With a loan prequalification 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 preapproved. In addition to helping the homebuyer determine the amount of money that can be spent toward the purchase of a new home, a loan prequalification helps the homebuyer learn how much the monthly installment payments will be. The homebuyer can also decide how much of a down payment is necessary.

Before visiting a lending institution for loan prequalification, a homebuyer can take advantage of numerous online mortgage calculators. These mortgage calculators also make it possible to determine how much the homebuyer can afford to take out in a mortgage loan, as well as how much monthly payments will be for specific mortgage loan amounts. Although the information on these calculators is not as accurate as the information provided by a lender, it does provide the buyer with a ballpark figure before visiting the lender.

A pre-apporoval goes one step further than a pre-qualification.  Preapproval lets sellers know that the bank has agreed, in principle, to approving your mortgage loan for homes within a certain price range. While not a guarantee, preapproval tells the seller that a bank or lending institution has looked  at your credit report and income and considers you to be someone who is likely to qualify for a loan.

When a lender is deciding whether or not to preapprove your application, they will look closely at your credit report, consider your credit score and other pertinent information, and factor in your income-to-expense ratio. Then they make their determination. Lenders don't generally charge a fee for preapproval applications.

If your application is accepted, your preapproval will be valid for two to four months. This gives you a window of time to go house shopping. If the preapproval period runs out before you find a home, you can apply again. Unless your credit rating has dropped, you will likely be preapproved again. Obviously, you will need to do everything within your power to maintain your good credit rating while shopping for a home.