Financial Dictionary -> Loans -> Pre-qualification

Pre-qualification, often called a quote, is a process used by a lender to determine how much a potential borrower of a loan or mortgage is eligible to borrow before anything formal is guaranteed and put down on paper. It is simply an informal evaluation of the borrower's finances to give both sides an idea about how much should be loaned and on what possible terms.

The process of pre-qualification is not a science and may differ from lender to lender, but it will usually involve a potential borrower getting in contact about possibly taking out a loan. The lender will ask a series of questions, such as average income, average expenses, value of assets and if the borrower has any debts. Going by this data they will then pull up a loan that might best suit the client. However nothing is put in writing and the quote is only as good as the data coming in. Because it is informal the potential borrower may be generalizing their answers.

With this data the lender will come to a conclusion as to whether the potential borrower is worth taking any further, or they may offer advice about different loans or services that might suit their stated circumstances.

Some pre-qualifications are more in depth and may use the formal application process without actually going through with said application, just to determine how much they could borrow should they decide that is what they want to do. This is good for those still unsure about taking out the loan in the first place.

Pre-qualification is usually a free service and is used to encourage potential borrowers.