This occurs when a lender estimates what size loan, usually a mortgage, you can afford. They also give you an estimate of what type of interest rate you will have, which goes a long way in determining how much you can afford. To get prequalified, you provide basic financial information, such as your credit history, income, assets, etc. Provide the following information: gross monthly income and total monthly payments (car payments, minimum monthly payments on credit cards, child support payments and all payments you have to make every month). You will also calculate your ratios. This is where you add all your debts together and compare that number to your income to arrive at your total debt-to-income ratio. The ideal percentage is under 36 to get the best interest rate. The lower the ratio, the better the interest rate.

You will also need to give your lender permission to pull your credit report. The report will include a FICO score, which is the credit scoring system most widely used by lenders. A FICO score of 680 or better is considered excellent, and with a good debt ratio you should get the best interest rates available. The lender will also determine roughly how much of a loan you are qualified for. A prequalification estimate is non-binding.

Being prequalified can help you narrow the range of homes in which you are interested, as it's another way of knowing what you can afford. It can also help you act fast if a home you're interested in has a lot of interest. Prequalification shows you are a serious shopper, and your offer will be taken more seriously than an offer from someone who has not spoken with a lender.

The initial pre-qualification stage also allows you to discuss with your lender any goals or needs you may have regarding your mortgage. He or she can then explain your mortgage options and recommend the type that might be best suited to your particular requirements. The lender can also discuss ways you can improve your prequalification status if it is not what you want it to be. They may suggest ways to lower you interest rates by improving your overall credit score, and your debt ratio. Remember the lower the ratio or higher the FICO score, the lower the interest rate.

Prequalification is not preapproval. There is a difference.