What is a mortgage pre-approval letter?

A mortgage pre-approval letter is a document from a lender confirming their willingness to lend you a specified maximum amount of money.

A pre-approval letter impresses sellers and real estate agents because it shows you’re a serious buyer with the financial ability to move forward with a purchase.

What’s the benefit of a pre-approval letter?

A pre-approval can ultimately secure your dream home and save you money. An offer from someone who’s pre-approved is more valuable than one from a rival home buyer without a letter. It’s common for a seller to accept a lower offer from a pre-approved buyer over someone with no letter.

And remember, you don’t need to offer the maximum amount your letter indicates you can borrow. You should choose an amount you can comfortably afford to repay.

Differences between “pre-qualified” and “pre-approved”

During your home search, a pre-approval letter will be a lot more meaningful to sellers — and a more powerful tool for getting you into your dream home. If you’re pre-approved, it means the mortgage lender has verified the financial information — like your credit history and debt-to-income ratio — provided in your mortgage loan application and confirmed your eligibility for the loan amount.

That’s because a pre-qualification or “pre-qual” is the lender’s best guess at your approval status based on your answer to a few questions over the phone or online.

Pros & cons of pre-qualification

Pros of pre-qualification

Mortgage pre-qualification is a cheap (often free), quick and easy alternative to pre-approval. And it’s certainly better than having no letter from a lender.

Cons of pre-qualification

Because the lender takes your word for all the claims you make in your mortgage application and doesn’t verify them, a pre-qualification is no guarantee.

Pros & cons of pre-approval

Pros of pre-approval

When you’re making an offer on a house, you’re far more likely to be successful if you’re pre-approved. Because the process for pre-approval is more complex, a seller considering your offer knows that a lender has already verified your financial situation and is prepared to lend you money to complete the purchase.

Cons of pre-approval

The process for pre-approval is much more complex. The lender will require supporting documentation from you and will independently verify the information you provide.

Indeed, pre-approval is very similar to a full application process with the exception of evaluating the property since you haven’t found that yet. Because of this, pre-approval gets much closer than pre-qualification to proving you qualify for the loan.

If you’re self-employed or have unusually complex finances, it’s especially important that you take the time to get pre-approved.

Many self-employed people overestimate their income. Lenders will use your adjusted gross income after expenses. For example, if you take in $100,000 per year, but write off $40,000, the lender will only use $60,000 to qualify. It’s better to discover these surprises before you get excited about a home to buy.

What kind of offer do sellers and real estate agents prefer?

There’s more to a home purchase offer than the amount. For sellers and realtors, these are the most attractive types of offer, ranked:

1. All-cash offers
2. Offers with a mortgage pre-approval letter
3. Offers with a pre-qualification
4. All other offers

If — all other things being equal — you are in competition with another prospective buyer who’s higher up on that list than you are, you may have to sweeten the deal by beating their offer with a higher offering price.

How to get a mortgage pre-approval letter

When should you apply for pre-approval?

It’s best to apply for a pre-approval letter when you’re ready to start house hunting.

The Consumer Financial Protection Bureau (CFPB) explains why:

Lenders typically check your credit before issuing a pre-approval letter, and the letter may have an expiration date on it (typically 30 to 60 days). For these reasons, many people wait to get a pre-approval letter until they are ready to begin shopping seriously for a home. However, getting pre-approved early in the process can be a good way to spot potential issues in time to correct them.

In other words, if you’re self-employed or have other characteristics that might take a lender a while to get its head around, you might want to ask for your pre-approval letter early in the home buying process.

Pre-approval requirements will vary by lender

Every lender sets its own policies for how long a letter is valid or how much it costs to get one.

As a result, you should shop around for your pre-approval letter. Ask lenders upfront what their policies are, including:

1. How much it will cost (some lenders charge an “application fee”)
2. How long it will remain valid
3. Cost of renewing it if it expires before you’ve found your new home
4. What documents you will need to supply (so you can get them ready in advance)

You don’t have to use the lender who issued your pre-approval letter

Once you’ve found the home you want and have agreed on a purchase, you don’t have to go with the lender who issued your letter. Feel free to shop around for the best available deal.

In fact, you should shop around because the picture might change once the home is known. And the only way to effectively compare loan offers is to get in loan estimates (standardized documents lenders must by law send to all successful applicants) and examine them side by side. Only those provide the level of detail you need to be sure you’re getting an excellent deal.

That said, you’ll probably want a loan estimate from the lender that issued your letter — and it might be the best deal. But a mortgage pre-approval letter does not commit you in any way.

What’s included in a mortgage pre-approval letter?

Pretty much all pre-approval letters will include the same key information. That includes:

1. Loan program: Whether you’re getting a conventional, jumbo, FHA, VA, USDA, or some rarer type of mortgage.
2. Loan type: Is it a fixed-rate or adjustable-rate mortgage (ARM)? Will it last 30 years, 15 years or some other term?
3. Amount of the loan: This is the maximum sum you can borrow.
4. Maximum purchase price: The loan amount plus your down payment.
5. Qualified interest rate: The mortgage rate the lender is willing to charge you.
6. How long the offer will last: The date on which the letter expires.

It’s important to note that your pre-approval letter isn’t actually a mortgage offer. And there are rare circumstances in which it could lapse even while it remains in-date.

For example, if you run up a lot of expenses on your credit cards, you’ll likely do severe damage to your credit score. Or if mortgage rates suddenly shoot up, you won’t be able to afford to borrow as much.

In those circumstances — and a few others — it’s possible for your pre-approval letter to be rendered invalid. But that happens rarely.

5 tips to help you get pre-approved for a mortgage

It’s up to each lender to decide what documentation it requires from you to issue a pre-approval letter. But pretty much all of them will require the following, which must be the most recent possible:

1. Proof of assets. Bank statements for checking and savings accounts, broker statements for investment portfolios, and any other documents that show your assets.
2. Good credit. You won’t be expected to document this because the lender will run its own checks.
3. Proof of income. Paystubs, W2s, and sometimes tax returns. It’s more challenging for self-employed people to prove their income and they may need to provide a range of documents.
4. Employment. Your paystubs help but you may require a letter from your employer confirming your length of service and that you’re still on the payroll.
5. Identification. By law, lenders must confirm that you are who you say you are. A government-issued photo ID may be enough but expect to show more if the lender has any grounds to suspect you aren’t who you say you are.

These are the minimum requirements. A lender can ask for any documentation it wants to satisfy itself as to your suitability as a borrower.

What’s a good credit score to buy a home?

When buying a home, you want a credit score as high as you can get it.

If you’re buying an expensive home and need an outsized mortgage (a “jumbo loan”), you’ll likely need a FICO credit score of at least 700 — and considerably higher if you want a low rate.

But, at the other end of the scale, some lenders require only a 580 score for FHA and VA loans. And if you make a down payment of 10%, you may be able to get an FHA loan when your score’s down at 500. Some other programs and lenders look for minimum scores of 620 or 640.

So “good” credit varies hugely depending on the loan program. But one fact applies across the board: The higher your score, the lower the mortgage rate you’re likely to pay.

Pre-approval letter FAQ

Does a pre-approval letter guarantee a home loan?

No. Even a mortgage offer doesn’t absolutely guarantee one. If your credit score drops dramatically, if you become unemployed or if the basis of your application materially changes, a lender can pull or amend your offer right up until closing.

But lenders want your purchase to proceed smoothly as much as you do so it’s rare for them to pull an offer without very good cause.

Does pre-approval mean I’m committing to a lender?

No, you can and should comparison shop among several lenders once you’ve found the home you want to buy.

Can I buy a house for less than my pre-approval letter?

Yes! Your pre-approval letter shows the size of loan that a bank is willing to give you but you should buy a home for a price you feel comfortable borrowing. The pre-approval indicates the upper end of your price range but feel free to shop below that.

Is a pre-approval letter required to make an offer?

Anyone can make an offer, pre-approval letter or no. But your offer is likely to be taken much more seriously by the seller and real estate agent if you have one.

Indeed, the seller might accept a lower offer with a pre-approval letter than from someone with only a pre-qualification letter or no letter at all. That’s because you’re much more likely to be able to close your purchase. Only all-cash buyers are in a stronger position than you.

Is a pre-approval letter binding?

Nope. A lender is required to honor a pre-approval letter and you are free to shop around for loans with other lenders once you’ve selected a house.

Should you get multiple pre-approval letters?

You can but there’s no reason to and there’s probably a cost to get each one.

Also, requesting more letters than you need might harm your credit score because many lenders carry out “hard” credit checks — sometimes called a “hard inquiry” — as part of the process, which inevitably impacts your credit report.

Instead of getting multiple pre-approval letters, talk through your needs with one of your preferred lender’s loan officers. If that lender doesn’t meet your expectations, shop around for better mortgage options.

How long does the pre-approval process take?

Some mortgage companies can turn around a pre-approval letter within a few business days but some of this will depend on you. If you have all your documentation prepared and ready to submit, you’ll receive your pre-approval that much faster. Similarly, if you are responsive to queries from the lender then the process will move quicker.

But even the most responsive applicants can expect the process to take a week or more if your application is less than straightforward. And a few unlucky people get mired in queries and requests for additional documentation for many weeks.