What is a Mortgage Pre-Approval?

A mortgage pre-approval is a process in which you establish how much you can afford to borrow to purchase a home. Lenders will determine your assets, credit score, and income so they can decide what loans you're eligible for, how much they can lend you, and what your interest rate could be.  

Pre-qualification

Don't let a pre-qualification be confused with a pre-approval. They are not the same thing. Pre-qualification is similar, although it doesn't determine as much information. It's a first look at your finances that doesn't require a full, or tri-merged, credit report, or bank payments and pay stubs. A pre-approval can determine much more critical information, whereas a pre-qualification is only an estimate.

Approval

A pre-approval is not the same as an actual approval. A pre-approval helps with the final approval because you have already provided your required financial information. However, other factors with the actual house still need to be approved. The lender needs to approve the following property details, to name a few: 

1. Condition of the home: Depending on what loan you have qualified for, some loans like an FHA require that all repairs to the house be finished upon moving in, such as cracked windows, roof issues, or missing handrails in a staircase
2. Appraisal: The house has to be appraised ( the process of accounting how much the home is worth) to make sure you aren't paying more than the house is worth, as this could negatively affect your loan.
3. The Title: Your lender will need to confirm who owns the property and that there are no claims or liens against the home. They will work with a title company to complete this process.
   

Getting Pre-approved For a Mortgage

The first thing you'll need to do is verify your financial information with your lender so they can estimate your potential loan. Here's what's required on your end:

Get Your Documents in Row

Getting pre-approved is the same as applying for a mortgage loan. You will provide all of your financial information to your lender, and they will take an in-depth look to determine what kind of loan you need. Your lender will need to review:

1. Employment verification
2. Proof of assets
3. Credit history
4. Identification
5. Debt-to-income (DTI)
   

So that your lender can review the things mentioned above, you will need to provide:

1.  W-2 statements
2.  Pay stubs
3.  Bank statements
4.  License
5.  Social Security number  (this allows your lender to review your credit report and scores)
   

Know When To Get Pre Approved

The right time to get pre-approved is when you know you're ready to start looking for a new home to buy. This way, you understand just how much you can afford, which will help your search. Knowing how much you may borrow from your lender is highly informative when figuring out price points. Having already been preapproved when you contact a real estate agent will also solidify that you're ready and able to buy a property. 

A pre-approval is often required in this current housing market! Most sellers won't allow prospective buyers to make offers or even view properties without a pre-approval letter from a lender.

Check that Credit Score

While getting pre-approved means that you'll have a hard inquiry into your credit, it doesn't mean it will significantly affect your score. In fact, it's encouraged for borrower's to shop around with a few different lenders! Once you have your credit pulled with a hard inquiry, it will start a shopping period (approx. 45 days) to allow multiple hard inquiries with mortgage lenders that will solidify into one "single" inquiry at the end of that 45-day period. This means your credit score is only affected by "one" inquiry instead of several.‍

‍You've Got Mail

You will receive a pre-approval letter once you've been pre-approved. This is your golden ticket for a couple of reasons. Real estate agents prefer to see your letter before they show you houses, which ensures that they are showing homes you can realistically afford. You may also share this letter with the seller when you're ready to make an offer. It ensures that you can indeed put your money (or the lender's) where your mouth is.

Nothing Lasts Forever

Understand that your pre-approval does indeed have a time frame on it, typically 60-90 days. Be mindful of when it expires throughout your house hunting journey. The good news is you can always extend by showing your lending your current credit score and financials. 

Show Them You're Serious

Whether you apply for a mortgage in person or online, getting pre-approved has many benefits when looking for a new home. It gives you control of the process and shows everyone else (real estate agents, lenders, sellers) that you're serious about buying a home.