A mortgage pre-approval is becoming more and more essential for most home-buying journeys, particularly in a competitive housing market. To set reasonable expectations for yourself, make strong offers on homes, and actually find a home you can love and afford, a mortgage pre-approval is the best way to get started.
However, not everyone knows about pre-approvals, the best way to go about getting pre-approved, or other best practices —especially when it comes to first-time home buyer loans. Here’s everything you need to know about pre-approval for a mortgage.
A mortgage pre-approval is how borrowers can determine how much money they qualify for to buy a home, according to a specific lender. After you apply, the lender will evaluate your creditworthiness and will then provide an official letter that indicates the loan type and amount available to a borrower, should everything pan out as expected.
Lenders will look at several specific factors to determine the approximate loan amount, mostly related to your financial wellness. At the very least, the following financial elements are standard qualifications that lenders will analyze:
The amount you can loan and whether or not you’ll be approved for your final loan terms greatly depends on how you’ve managed debt in the past and if you have enough income to make consistent payments. Lenders won’t willingly approve (or pre-approve) borrowers who are likely to default on their loans, which is why they so thoroughly evaluate your borrowing readiness.
Also note that a pre-approval offer isn’t a commitment or contract—if there are changes in your finances or employment, if the value of the prospective home changes after an appraisal, or if a similar scenario occurs, lenders aren’t legally obligated to stick with the pre-approval terms or amount. Rather, the mortgage loan and amount are finalized after the home appraisal and when the loan is applied to your specific home.
While pre-approval on a mortgage and pre-qualification are often used interchangeably, there are some subtle but significant differences between the two. Overall, a pre-approval is more useful and valuable than getting pre-qualified, but both still have their perks.
A mortgage pre-approval requires you to complete a loan application and consent to having your credit checked, which will go on your official credit history and likely impact the score a bit. Borrowers usually have to provide bank statements, pay stubs, and other documentation for the lender, too. Your finances are closely examined by lenders for a pre-approval.
Getting pre-qualified is similar, but lenders look at more of an overview of your finances and don’t require a credit check. It isn’t as official as a pre-approval because lenders don’t pull your credit—instead, it’s just an approximation, mostly for the benefit of a borrower. Getting pre-qualified is mainly about determining how much you could loan, but being pre-qualified doesn’t carry the same weight when making offers on a home compared to pre-approvals.
If you just need to get an approximation of what you might qualify for mortgage-wise, pre-qualification is a good route. However, if you’re more serious about getting a mortgage loan and need some reliable documentation about what you are eligible for, a pre-approval is a better option.
One of the primary benefits of a mortgage pre-approval has to do with making an offer on a home. Sellers may be skeptical of home buyers who claim they have the funds to purchase their home but back out at the last minute. To be more competitive as a buyer, an official pre-approval letter shows sellers that you are serious about making an offer and that you have the means to buy the home.
You should also get pre-approved so that you know where you’ll be successful in the housing market. It can be discouraging to face rejection after rejection, and a pre-approval is one way to understand your options and make the most of both your money and time.
Another big reason to get pre-approved is to see what kind of rates you qualify for, especially compared to multiple lenders. While many lenders use similar standards or benchmarks to determine interest rates, lenders still differ and may offer higher or lower rates depending on your finances and circumstances. Getting pre-approved lets you shop around for both houses and lenders.
Some people will be eligible for specific types of mortgages, which are more officially determined with a pre-approval. For example, FHA loans can be good first-time home buyer loans, even for people with bad credit and zero down. However, this isn’t the case for everybody, and sometimes, the type of loan can make a big impact on your repayment options. Pre-approval gives borrowers a little more reassurance as to what they are eligible for, which makes it easier to decide on lending or selecting a home to purchase.
Finally, getting pre-approved for a mortgage streamlines your application process. Instead of finding a home and then going from lender to lender trying to get approved, you have a good idea of the purchase price you’ll qualify for. Plus, when it comes time to officially get approved for the loan, your loan process will be well underway, so your loan is more likely to close faster.
Your pre-approval will usually expire after 60-90 days depending on the lender because your finances and credit can change over that much time, so you don’t necessarily want to casually get pre-approved if you aren’t actively looking.
However, especially in a competitive market, the earlier you get pre-approved, the better. You also want to have a pre-approval letter handy so that you don’t miss out on a good opportunity. By going through the pre-approval process early enough, you also will find red flags identified by the lender that you can work on to qualify for better terms by the time you find your house.
Mortgage pre-approvals aren’t quite as high-stakes as waiting for the final approval, but because they are still a valuable tool for future borrowers, it can still be both exciting and nerve-wracking. Still, the pre-approval process can be broken down into 3 basic steps: documentation, credit checks, and acquiring your pre-approval letter.
The pre-approval mortgage process is fairly straightforward for borrowers as long as they have the necessary documentation for lenders to review. This is essentially a loan application, and as stated, lenders will look at your income and employment, credit history, current debt, and more. Documents and information you should be prepared to provide include:
A pre-approval mortgage application is going to require a hard inquiry into your credit, which may slightly lower your credit score, though it shouldn’t significantly affect it. If you’re getting pre-approved by more than one lender, you won’t be dinged multiple times if the credit is pulled within about 45 days.
You should get a pre-approval letter, but if for some reason the lender doesn’t automatically provide one, request one so that you can show both realtors and home sellers that you have the intention and the funds to buy a home. It can be difficult to figure out the timing of purchasing a home, so a pre-approval letter can make all the difference in actually getting your offer accepted on time. Letters typically have the purchase price, loan program, interest rate, loan amount, down payment amount, expiration date, and property address included.
Depending on the lender and the pre-approval process, it usually takes up to 3-10 business days to get pre-approved. Sometimes lenders will have an online method of processing pre-approval applications, which can take just a few hours. The estimate should confirm whether or not you’ve been approved and the loan amount you’ve been approved for.
Getting pre-approved by more than one lender is a smart move for most borrowers—as mentioned before, different lenders will offer different rates and loan terms, so you don’t necessarily take the first offer you receive. Shop around to find the right lender for you and your circumstances. Keep in mind, though, that it’s best to apply for mortgage pre-approval within the next 45 days so that your credit isn’t facing multiple hard inquiries, which will take a toll on your credit score over time.
If you’re trying to find the right lender or need help figuring out what you may qualify for, you can start with SOLD.com. Our services help pair you with the right people so that you can get the right lender, real estate agent, or whatever you need as quickly and as painlessly as possible. Get a free home valuation today to get started!