If you are serious about buying a house in the next few months, there is one thing you should do right away: get a mortgage pre-approval. It could be your golden ticket to winning a bid for your dream house.
When the real estate market is competitive, sellers and their agents often won’t consider an offer without pre-approval. Below, we’ll walk you through how to get pre-approved, so you can become the most competitive buyer possible.
What is a mortgage pre-approval?
You could think of a mortgage pre-approval as a practice run for your actual mortgage application, which you’ll submit once you’ve entered a contract to buy a home.
To get pre-approved, you’ll provide detailed information about your income and assets that will be reviewed by the mortgage lender’s underwriters — just like you would with an official mortgage application.
But there’s more value to a pre-approval than an opportunity to practice. If you get pre-approved, you’ll get a conditional commitment by the lender for a specific loan amount.
This conditional commitment, known as a mortgage pre-approval letter, shows your price range — and it tells home sellers you’re a serious buyer.
How to get pre-approved for a mortgage
To get pre-approved for a mortgage loan, you’ll need to work with a lender. The process works almost exactly like the actual mortgage application process.
Here’s what to expect:
Step 1: Get your documents together
Pre-approval will be simpler when you gather your financial documents before starting the process. You’ll need:
- Proof of income: Find your last two pay stubs from all your jobs. If you’re self-employed, ask your loan officer about using 1099s, an IRS Schedule K-1, or bank statements that show deposits. If you’re documenting child support, alimony, or disability insurance benefits, gather information about those sources of income.
- Proof of employment: Your lender may contact your employer directly. If you’re self-employed, a transcript from your tax return may be required as proof.
- Proof of assets: Have your recent bank statements ready so you can show your down payment and closing cost funds. Also, get together your 401(k) or IRA statements. If you’ll use down payment money from a gift, your lender will ask for a letter from the donor.
- Proof of identity: Your driver’s license, state ID card or Social Security card may be required for this. Your Social Security number allows the lender to retrieve your FICO score.
- Information about other monthly debt: You’ll need to submit your student loan, auto loan and personal loan balances and monthly payments. This helps the lender measure your debt-to-income ratio or DTI.
As you can tell, mortgage lenders need to know a lot about your financial situation. Gathering all this data now will save a lot of time once you’ve under contract on a home.
Step 2: Apply for pre-approval
With most lenders, you can start the pre-approval process online. If you’re working with a neighborhood bank or credit union, you may have to submit part or all of the application on paper.
Before starting the process, make sure you have set aside a few hours to upload the documents you’ve gathered.
Many online lenders will help you narrow your loan choices during the pre-approval process. For example, by asking whether you’re a first-time home buyer, or whether you’re buying a single-family residence, the system is already pairing you with loan options.
Follow your lender’s steps all the way through until the end of the process.
Step 3: Use your pre-approval to inform your next steps
If the lender does not approve your application, it will tell you why. This information should tell you which aspects of your financial life need improvement before you apply again.
If the lender does pre-approve you, you’ll receive a Loan Estimate which shows the maximum amount of money you can borrow for a home purchase or refinance. You’ll also see your proposed interest rate and mortgage payment.
These estimates show the maximum amount you can borrow for a home purchase, but this doesn’t mean you have to borrow up to that amount. Instead, make sure you’re comfortable with the payment amount.
If you don’t think you can afford the mortgage payment, you’ll know to shop for homes with lower purchase prices. Homes with lower prices usually require lower tax bills and smaller homeowners insurance premiums, too.
What can a pre-approval do for you?
No, it’s not cash in hand, but a mortgage pre-approval can significantly strengthen your offer (the only better option would be an underwritten approval, which some lenders will provide before you even find a property). It shows home sellers that you have the credit history and financial standing to buy their home.
“If you can get an offer to the homeowner, it says ‘here is my bank statement and I have enough cash and good enough credit to buy your house,’” says Steven Bogan, regional managing director of Glendenning Mortgage Corporation in Toms River, New Jersey. “A pre-approval just helps with less aggravation and less work for everyone in the transaction.”
A pre-approval also tells your real estate agent and yourself what your home shopping price range is. Knowing how much house you can afford means you can be more targeted in your house hunting.
Again, you may not want to buy a house at the top level of your affordability. You need cash reserves for many things once you buy a house including an emergency fund for when things go awry or for new furniture or a lawnmower.
What is the difference between pre-qualified and pre-approved?
Bogan says there is no official definition from Fannie Mae or Freddie Mac or from the Department of Housing and Urban Development (which regulates FHA loans).
The names “pre-approval” and “pre-qualification” can vary from Realtor to Realtor and lender to lender.
But generally speaking:
- A mortgage pre-qualification: estimates your borrowing power based on what you say about your financial situation
- A mortgage pre-approval: estimates your borrowing power based on what you can document about your financial situation.
So a pre-approval is more useful for serious home shoppers: It tells you and the seller that you’re very likely to get approved by a lender.
Mortgage pre-qualification can be helpful, too, as long as you report your financial details accurately. A pre-qualification gives you an idea of how much money you might be approved for without taking you through the entire mortgage process.
How can you pick the right lender for your pre-approval?
Lenders from all sorts of institutions, from banks to credit unions to mortgage corporations, offer pre-approvals and mortgages.
“We encourage people to reach out to people they know such as friends who bought a house recently,” Bogan says. “You can talk with your financial planner, attorney or accountant that you trust and get some feedback from them.”
What items does the lender need for a pre-approval?
The documents for the pre-approval process are the same documents that you would need for a mortgage loan application. Bogan says the financial information usually asked for includes:
- 30 days of pay stubs
- Two years of tax returns along with the W-2s or 1099s
- Two months of savings and checking bank account documents
- Anything to do with your 401(k)s
You will need to provide an explanation and documentation of funds that were deposited that aren’t associated with your pay stubs. The lender will also need to run a credit check.
Also, before ever talking with a loan officer, make sure you understand your own financial picture. Do you pay your bills on time? Do you understand how much debt you have, and how high is your credit score? Did you default on a student loan? Do you have way too much debt on credit cards?
Sometimes, lenders can help you with getting you on the right track credit-wise to get the best mortgage rate and loan type.
Does it cost anything to get a pre-approval letter?
The only thing a lender can collect for is the cost of pulling your credit report, which is usually $50 or less, Bogan explains. Some don’t charge anything at all.
How long does it take to get a pre-approval letter?
“That depends on how strong of a homebuyer you are,” Bogan says. “For someone who produces the information that is requested and doesn’t have a lot of moving parts, it can be done in less than an hour.”
Even if yours is a complicated case — for example, if you’re self-employed — you should have a response within three business days.
If it is taking longer then that should raise some red flags. “Will they be able to prioritize your loan for your contractual obligations? Some places get so understaffed because they have been offering such a great deal on mortgages,” he says.
You can help the pre-approval process go quickly by having your documents prepared and being responsive to any questions from your lender.
Do you need to use the lender who issued your pre-approval?
“At this point, you have started a relationship. You are turning over a substantial amount of private information. The decision usually has been made in your mind to use this person for the loan,” Bogan says.
Often, once borrowers start the preapproval process with a lender, they use the same one for their home loan.
But it’s a competitive industry and you’re not locked in. If you find better mortgage options with another lender — for example, a better mortgage rate or better loan terms — then it’s worth considering making the switch.
FAQs about the mortgage pre-approval process
How fast can you get pre-approved for a mortgage?
With today’s online lending platforms, you could be pre-approved within an hour if you have a simple financial life and you gather up your W-2s and pay stubs before starting the process. More complex applications could take a few days or more.
Is mortgage pre-approval instant?
Digital underwriting allows for quick decisions on simple mortgage applications, those from borrowers who earn all their income from an employer. But it could still take up to an hour to get an answer on your pre-approval.
Who is the fastest mortgage lender?
Many lenders claim to have the fastest turn times. Responsiveness is important in a lender, but there are more important variables such as customer service, competitive mortgage rates, and low lender’s fees.
What is a mortgage pre-approval and why does it matter?
A mortgage pre-approval is a dress rehearsal for your actual mortgage application which you’ll submit after going under contract to buy a home. A pre-approval has two big appeals: It can show your price range and it can show sellers you’re serious about buying.
What’s the difference between pre-qualification and pre-approval?
When you get pre-qualified for a mortgage, you tell the lender about your financial life and the lender uses your figures to estimate your borrowing power. With a pre-approval, you submit financial documents and the lender analyzes them as if you were applying for the mortgage itself.
When should I get pre-approved for a mortgage?
If you expect to go under contract on a home within the next couple of months, you need a mortgage pre-approval. Waiting until you’ve already gone under contract could delay your closing if your mortgage process hits a snag.
How long does a mortgage pre-approval last?
Most pre-approvals last 60 to 90 days. If your pre-approval expires, you’ll need to upload fresh documents to get pre-approved again.
Why should I get pre-approved by more than one lender?
A pre-approval serves as a loan offer. Getting more than one pre-approval creates more than one offer so you can compare rates and fees. This is different from comparing rate quotes you see on lender websites. Rate quotes are based on an average borrower; pre-approval rates are based on your actual financial data.
Will getting pre-approved by multiple lenders hurt my credit score?
A credit check from a pre-approval will likely lower your score by a few points, at least temporarily. But this doesn’t mean each separate pre-approval process will lower your score. When multiple lenders check your score within two weeks, all of the checks will count as only one hard inquiry. However, spreading your applications across several months could result in multiple hard inquiries with each one lowering your score.
Pre-approval is the first step in the home buying process
Ready to buy your dream home? Getting pre-approved by a mortgage lender is the first step towards buying the new home of your dreams.