What Is Mortgage Pre-Approval?

What Is Mortgage Pre-Approval?
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When you're a homebuyer, you need to know how much you can afford. A mortgage pre-approval for a home loan will give you that answer to help you shop smarter and make more serious offers.

Let’s look at the advantages of getting a mortgage pre-approval and what it takes to get one.

What is a Mortgage Pre-approval?

A mortgage pre-approval will analyze your finances and tell you how much you can borrow before you start looking for a house. With this information, you can narrow down your homebuying searches to those that you can afford within your budget.

For a mortgage pre-approval, you will complete a full mortgage application with all required supporting documentation.

A lender will look at your income, assets and your credit score to find out which loans you might be approved for. The pre-approval process will give you the maximum borrowing limit and the interest rate you might receive. You don't have to borrow the maximum amount. You can borrow less if you find a house you like with lower payments.

A mortgage pre-approval is not a final commitment for a loan. That final loan commitment will come after you have selected a house, and the lender can get an appraisal and examine the condition of the property to make sure it qualifies.

While applying for preapproval, it's also a good time to discuss various types of mortgages with your lender to find the best option for your budget. For example, should you get a 30-year​ mortgage or go for a ​15-year​ mortgage? Can your budget afford the slightly higher payments on a ​15-yearmortgage? Or would an adjustable-rate mortgage make more sense in the current interest rate environment?

The lender will pull a hard inquiry on your credit report. This may drop your credit score a few points but it shouldn't be a significant long-term problem. If you are shopping with other lenders, you should make all these inquiries within ​45 days​. If you stay within the ​45-day​ timeframe, multiple inquiries should count as a single inquiry and not affect your credit score.

Why Get a Mortgage Pre-Approval?

A mortgage pre-approval shows the seller that you are serious and are already qualified for a loan. This puts you in a much stronger negotiating position with the seller. While sellers would certainly like to get the highest price, they also don't want to waste time on offers that fall through because of a lack of financing. A pre-approval tells the seller that you can get a loan for the amount you've offered.

In a hot housing market, sellers may not even entertain offers from prospective buyers if they do not have pre-approval letters.

Real estate agents like to know that a buyer has already been approved for financing. They will work more enthusiastically in finding the right house for you if they don't have to worry about you qualifying for a loan. Real estate agents work on commissions, so they are more likely to spend time with you if there's a good chance they'll make money on the sale.

Applying for a pre-approval with several lenders will give you time to shop for the best interest rates and type of loan that fits your budget. Once you decide on a house, the final closing of the loan will take place much faster because all of your financial information is already in the lender’s system, and the lender’s underwriter has already reviewed and approved your finances.

Another advantage of going through the pre-approval process is to uncover any potential negative issues that might prevent you from getting a mortgage. This will give you a chance to work out any problems before starting your house search, falling in love with a particular home and getting disappointed when your mortgage application is declined.

What is a Mortgage Pre-Qualification?

A mortgage pre-qualification is not the same thing as a mortgage pre-approval. A pre-qualification is only an estimate of what you might be able to borrow based on the information that you give to the lender. Lenders do not check or verify any of the information that you give them. They take your word that all of the information is accurate.

You do not have to supply a lot of documentation, like pay stubs and bank statements, to get pre-qualified, and the lender will not pull a hard credit check for a pre-qualification.

A mortgage pre-qualification is not a commitment. It is simply an estimate of how much money you might be able to borrow and the interest rate you might receive based on the information you presented.

What are the Steps for a Mortgage Pre-Approval?

Your lender will need the following information:

  • Proof of income
  • Income tax returns
  • Verification of employment
  • Statement of assets and liabilities
  • Credit history
  • Debt-to-income ratio
  • W-2 statements
  • Pay stubs
  • Bank statements
  • Driver’s license or U.S. passport
  • Social Security number

Generally, you will be able to get a response from your lender within three business days.

What is a Mortgage Pre-Approval Letter?

Getting a mortgage pre-approval is not a guarantee that you will be approved for the loan. While the lender has gone over and accepted your finances, they still have to check out the property to be sure it meets their qualifications.

These are the property details that your lender will check:

  • Appraised value​ – A lender will request an appraisal to make sure you're not paying more than the home's actually worth. The lender will use this appraisal to calculate the loan-to-value ratio.
  • Title clearance​ – A title company will do a search to confirm the name of the owner of the property and find out if there are any claims or liens against it.
  • Condition of the home​ – Some loans have minimum standards for the condition of the property. For example, FHA loans may get rejected if the property has broken windows or a roof in poor condition.

If the property checks out, the lender will issue a mortgage pre-approval letter to you.

It varies from lender to lender, but pre-approval letters are usually valid for ​60 to 90 days.​ Lenders put a time limit on pre-approval letters because your finances and credit score could change for the worse before the loan closes. If you let a pre-approval letter expire, you will have to start over with a new mortgage application and updated documentation.

Getting a mortgage pre-approval is a wise move to make before you start house hunting. You'll get some idea of the amount of money that you can borrow and the interest rate that you will pay. Even more, you'll be in a stronger position with real estate agents and sellers to get better pricing. Having a mortgage pre-approval letter makes you a serious buyer.