What is it? A prequalification is an opinion based on the information provided. If the lender is competent and the information is accurate, a prequalification can be a useful tool.
What value does it have? Since a prequalification is NOT an approval, its main function is to determine what the next steps should be. Those steps could include: getting full a pre-approval, meeting with a Realtor to see what you can buy with the financing limitations/information that was provided, taking a homebuyer education class, or working on the issues that are limiting or preventing you from buying what you want.
What are the biggest problems with prequalification? Because the lender is usually working with less than a complete loan package, they need to make a lot of assumptions that may turn out to be incorrect. I’m not of the opinion that people actually lie, but rather people not in this business don’t know what we are looking for. The result is that the child support payment that comes out of the paycheck is forgotten, or the unreimbursed business expenses that are written-off or the Amway business loss are not mentioned. Then when the tax returns or paystubs are reviewed, things change drastically.
What information is needed? Income, bills, cash, credit, and family size.
What documents are needed? It’s entirely possible to do a prequalification with no documents whatsoever. About 10 minutes on the phone and a competent lender can give a fairly good idea of what a borrower’s options are. However, it’s really not a very good idea… The more documentation the lender receives, the better. Personally I like to see paystubs, bank statements, a list of bills with balances and minimum payments, and an idea of what the borrower thinks their credit looks like – or a copy of a credit report if they have one. Then I ask a few questions to get some basic details and to see if there is something else I should ask about.
Who should NOT get prequalified? Anyone who might want to buy in the near future should get pre-approved, not prequalified. The question I use to determine this is: “If you found the perfect house, priced right, and in the exact location you want to buy, would you want to write an offer? If the answer is no, we aren’t ready yet, then a prequalification is probably all you need to do. However if the answer is yes, if it’s exactly what we want then I probably would want to submit an offer DO NOT JUST GET PREQUALIFIED! Go to the next step and get the information to your lender, and get pre-approved. There is nothing worse than loosing out on a home because you could not provide a strong pre-approval letter. Listing agents are starting to demand not only strong pre-approval letters that specifically mention what steps the lender has taken, but proof of funds and even Fannie Mae approval printouts!