What does "prequalification" in mortgage lending involve?

Prequalification in mortgage lending primarily refers to an informal evaluation of a borrower's financial situation. This process involves a lender assessing the borrower's income, debt, and credit status to provide an estimate of how much they might be able to borrow. It's typically a preliminary step that does not require a thorough investigation of the borrower's financial details, which is why it is described as informal.

During prequalification, a borrower may share information regarding their financial assets, income sources, and monthly obligations, allowing the lender to give a broad estimate of the possible loan amount. However, unlike a formal preapproval, prequalification does not involve a rigorous verification of the borrower's financial information, nor does it result in a legally binding agreement. Additionally, prequalification does not guarantee interest rates, as these are often determined later in the mortgage process.

Understanding that prequalification is mainly about providing potential borrowers with an idea of their borrowing capacity helps clarify its role in the mortgage lending process and distinguishes it from other, more formalized steps in acquiring a mortgage.