Pre-qualification is the first look a lender takes at what you could borrow. You tell the lender your income, your monthly debts and roughly where your credit sits, and the lender runs those numbers through the loan program's limits to estimate a price range.
Lenders use the word differently. The CFPB points out that some lenders pre-qualify on the information you report and only call it a pre-approval once they've verified it. Either way, a pre-qualification is an estimate, and its accuracy depends on the numbers you give.
What the lender looks at
The estimate rests on three numbers you supply:
- Income. Your gross monthly income, before taxes, from each job or source you'll use.
- Debts. Every monthly debt payment: car loans, credit card minimums, student loans, personal loans, plus any child support you pay. Rent, utilities and phone bills don't count.
- Credit. A score range decides which programs are open. FHA starts at 580 for 3.5% down and Conventional starts at 620.
From there, the lender applies the debt-to-income limits. With an FHA automated approval, housing can reach 46.9% of gross income and total debts can reach 56.9%. Conventional allows total debts up to 50%.
A pre-qualification worked out
A renter earns $5,200 a month before taxes and pays $450 on a car and $120 in credit card minimums. The score is in the 600s, so FHA is the starting point.
| Test | Math | Payment allowed |
|---|---|---|
| Housing limit, 46.9% | $5,200 × 0.469 | $2,438.80 |
| Total debt limit, 56.9%, minus other debts | $5,200 × 0.569 = $2,958.80, minus $570 | $2,388.80 |
The lower figure wins, so the house payment can run up to $2,388.80. At a 5.75% rate on a 30-year fixed, with taxes at 0.95% of the price and insurance at $250 a month, a $305,000 home works out like this:
- Base loan, 96.5%: $294,325, plus the 1.75% upfront premium for $299,475.69 total
- Principal and interest: $1,747.66
- Annual mortgage insurance: $134.90
- Taxes: $241.46
- Insurance: $250.00
- Total: $2,374.02, under the $2,388.80 limit
So this buyer pre-qualifies for a home around $305,000, with $10,675 needed for the 3.5% down payment unless FHA 100% financing covers it.
Moving from pre-qualified to pre-approved
Pre-qualification sets your range. The next step is a pre-approval, where a lender pulls credit and checks your pay stubs, W-2s and bank statements. If the pre-qualification came in lower than you hoped, the usual fixes are paying off a small debt to free up room in the 56.9%, adding a co-signer's income, or looking at FHA 100% financing to remove the down payment.
QualRate's home affordability calculator is a pre-qualification you can run on your own phone, with no credit pull. When you want the real pre-approval, call AAA Capital Funding at 888-601-8344.