What is Qualification?

If you are interested in borrowing money, you probably already know there are several requirements to fulfill before getting a loan. The first step in the loan process typically involves a qualification review. Almost any time you get a loan, whether it is a student loan or a car loan, the lender wants to make sure you have the resources to settle your debt.

It is important to make the distinction between qualification and approval, because many people assume once they qualify for a loan, they will automatically be approved. In reality, it is easier to qualify, because the process does not include your credit history and it may or may not involve verification of your financial information.

Qualification is often referred to as pre-qualification and is a common first step when taking out a large loan such as a mortgage. Prior to house hunting, it is wise to find out how much you are qualified to borrow, so you can tour properties in your price range. If you don't know how large a loan you can get and begin looking at homes costing six figures, it will be both a letdown and a rude awakening once you realize you can only afford a house in the half a million dollar range.

Pre-Qualification Process

The pre-qualification process is straightforward. You will need to contact your preferred lender and provide some basic financial information. Most of the time, lenders are focused on determining whether or not you have enough cash and income to meet the requirements of the desired loan, as well as information regarding your assets and any current debt. Keep in mind - even if you are a qualified borrower, a poor or nonexistent credit history or other details pertaining to your financial portfolio may prevent you from being approved.

During the qualification stage, the lender does not verify the information you provide. He or she trusts your word, so it's important to be as truthful as possible. After all, if you go forward with the process, the lender will be conducting a thorough examination of your finances, so there's no point in trying to pad the numbers, so to speak.

Since the lender does not verify your information, qualification is not considered a binding agreement. Once you move into the next step of the application process, approval, the lender looks over your credit report, makes sure all the details you have provided are accurate, and makes a binding agreement based on his or her findings.

Even though qualification is not a guarantee you will get a loan, it is a useful way to gauge how much you can borrow. Before you borrow money, it is helpful to know how much you can afford. Ideally, by getting the approval process started via pre-qualification, the lender will be able to guide you in the right direction based on your income, assets, and current debt.

In order to be an informed borrower, take the time to go through the pre-qualification process and determine what type of loan is best for your current needs and abilities. Becoming a qualified borrower is a great way to avoid being turned down for a loan down the road or swimming in debt due to a loan you simply can't afford.