What does pre-approval determine for a prospective homebuyer?

Pre-approval is a crucial step in the home-buying process as it provides prospective homebuyers with an estimate of how much money they can borrow before they formally apply for a loan. During this process, lenders evaluate the borrower's financial situation, including income, credit score, and existing debts, allowing them to determine an appropriate loan amount. This helps buyers understand their budget when shopping for a home and demonstrates to sellers that they are serious and financially prepared to make an offer.

Determining the maximum down payment required, the specific type of mortgage to apply for, or the exact interest rate of the loan can come later in the loan process or depend on various factors, but the primary function of pre-approval is to ascertain borrowing capacity. Therefore, knowing how much money they are eligible to borrow provides buyers with confidence and clarity as they navigate the real estate market.