What is the purpose of a pre-qualification letter?

A pre-qualification letter serves the purpose of indicating a borrower's likely qualification for a loan based on the financial information they provide to the lender. This process typically begins with the borrower sharing details regarding their income, assets, debts, and credit history. The lender uses this information to assess whether the borrower meets the general guidelines for loan approval. However, it’s important to note that this assessment is not definitive; rather, it gives borrowers an idea of how much they might be able to borrow and helps them understand their purchasing power.

The pre-qualification process is generally more informal and does not involve a thorough assessment of the borrower's credit report or verification of their financial details, which distinguishes it from a pre-approval process that is more stringent and involves additional steps.