Question: Why do I have to "prequalify" before I go out looking?

Answer: Almost all prospective buyers that I come in contact with, wonder about (and some resent) the fact that loan prequalification before one goes shopping is a necessity these days, unless the buyer plans to pay cash. Even in a cash deal, a seller will often want the purchase funds to be verified before they accept an offer. For all the rest of us, the seller is almost certainly going to want a lender letter stating that they've investigated the buyer's financial profile and are satisfied that he/she will be able to obtain the financing they desire.

Even more important though, are the benefits that early prequalification offers to the buyer. After all, why would one want to go out looking at a bunch of houses, get an offer accepted, only to find out that they can't get the financing they want, usually for some obscure reason known only to the bank? Approval guidelines change daily, in fact, hourly lately, considering the well publicized, now over-publicized "mortgage crisis." So, even though a buyer may think they can afford a given payment, have great credit, good income and money in the bank, it's entirely possible that a lender will not approve him/her for financing.

Here's an example of what I mean: Lawyer Bob (fictional person in case there's a lawyer named Bob reading) has worked as an employee for a major insurance company for 10 years, making a six figure salary. He decides to open his own practice at the behest of the many potential clients he has met, and the practice explodes with business. Six months later, he's making twice the monthly income of his former salary, has all his bills paid off, beautiful credit, and money in the bank. So he decides to buy a bigger home consistent with his higher financial/professional profile, and for the major tax deductions that the mortgage interest and property taxes offer (a GREAT reason to own a home by the way). Because he has the money and is a conservative guy, he plans to put down 25% of the purchase price. Will he get the financing he desires?

Probably not! Most lenders require self employed borrowers to be able to show a two year track record of earnings. Even if they don't require verification of income ("stated income") they will require that he have been self employed for at least two years as evidenced by business licenses, a letter from his CPA or whatever. Hopefully he hasn't sold the house he already owns before he goes out looking...
Bob could have saved a lot of time and effort by prequalifying and it would have been a lot less expensive (free?) than what he's charging his clients....

On a more positive note, prequalifying means that a prospective buyer gets to talk to a lending professional who can not only sort through that person's particular profile to determine if a loan is possible at all, but also guide them through a selection process to the product that will best fit the buyer's needs. For example, there are probably a dozen or more ways to finance a home with nothing down. Each program has its own peculiar requirements and some are significantly less expensive than others. Unless the buyer has a lot of time and expertise to do the research, there's a good chance he/she will fail to find the best fit on his/her own. Better to talk to a lending professional who can walk them through all the benefits and drawbacks of each. It's a lot quicker, more efficient, and in the end, you can shop with the certainty of having financing when you need it.