Loan prequalification is a process that pre-qualifies a homebuyer for a specific loan amount for purchasing a home. A prequalification letter is a document the the homebuyer receives from a lending institution as to the amount available to them in purchasing a home.

The loan prequalification process rather easy. A loan officer asks the homebuyer several questions in determining DTI "debt to income" ratio, some documentation may be required. The homebuyer will need to provide proof of income and show all debt. In order to determine this ratio, the loan officer needs to know the homebuyer's: debt, assets, credit, and employment status.

After the information is evaluated, the loan officer is able to provide the homebuyer with an estimated budget for 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 give a general idea as to how much the monthly payments will be. The homebuyer can also decide how much of a down payment is necessary.

As valuable as loan prequalification letters can be, they are not a guarantee of a loan. The actual loan approval process is a long and sometimes tedious process, even for A paper borrowers.