How to get a mortgage pre-approval

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And why apply for one?

Unless you have enough cash to buy your home outright, one of the first things you’ll do before you buy a home is apply for a mortgage. A mortgage pre-approval means you’ll have a better understanding of your budget and that you can be more confident that you’ll have the financing in time to close on your home. 

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What is a mortgage pre-approval?

In order to finance your mortgage, a lender needs to do a deep dive into your finances. That way, they know how much to lend you based on how much you’d realistically be able to pay back. But this takes precious time in a competitive market. 

A pre-approval is a written statement you can show a seller that outlines the amount you could potentially be underwritten for once an appraiser establishes the property’s value. 

To pre-approve you for a mortgage loan, a lender will obtain a credit report from one or more of the major reporting agencies. They’ll use this information to get a general idea of your creditworthiness and your credit score and provide you a confident estimate of the amount of money they’ll likely lend you to buy a home.

Your final loan amount will take into consideration the property value too so you won’t be underwritten for the loan until your lender gets the property appraised.

How do appraisals affect your mortgage loan?

Before your lender will finally underwrite your loan, they will first get the property appraised. A mortgage lender will pre-approve you based on what they find after they dive into your financial situation, but the final loan amount takes into consideration the value of the property, too. A pre-approval assumes that the house you want to buy will appraise for at least the offer price.  If the appraisal comes in lower than the offer price, the mortgage amount you qualify for could be lower.

So even if you’ve been pre-approved for one amount, your final loan may come out to less if the home is appraised lower. In other words, you can make an offer on a home based on the amount you are pre-approved for but your lender may not actually provide that full amount if the appraisal is low.

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Why get pre-approval for a mortgage? 

It can take a few weeks to underwrite a loan and that is precious time in a competitive market where homes sell in under a month. So some buyers may begin to tour and even make offers on homes before they have a good idea of what they’re actually qualified to borrow. But that means there may be a greater chance that a lender may find something in that buyer’s creditworthiness that affects their mortgage application than if the mortgage were pre-approved. Offers from buyers who aren’t pre-approved usually have financing contingencies that give the buyer a certain number of days to apply for, and be approved for, a mortgage before they forfeit their earnest money deposit. The seller, then, would have to accept that, if their buyer doesn’t ultimately get approved for a mortgage, there is little they can do except re-list their home. 

With that kind of uncertainty, a home offer without a mortgage pre-approval is less competitive. But a pre-approved mortgage provides a bit more certainty for both the buyer and the seller. 

Pre-approval vs. pre-qualification

No, they’re not interchangeable. The big difference between pre-approval and pre-qualification is that pre-approval involves a lot more scrutiny. During a pre-qualification, lenders will obtain a credit report and ask you to tell them your income, a rough estimate of your debts and assets, and your budget for a down payment. It is considered more of a ball-park estimate of your qualification and is not a commitment to lend from the lender. It’s “if everything you told us is true, here’s what you could qualify for in a mortgage.”

By contrast, a pre-approval is a more concrete step because the lender actually verifies the information that’s provided by you along with a credit report. Generally, sellers want to see pre-approvals when considering serious offers and some real estate agents will only accept offers from pre-approved buyers. A pre-qualification is a commitment to lend, subject to certain conditions (such as no change in income or debts, etc.). Additionally, a pre-qualification can be useful for future buyers who are curious to know how much of a mortgage they might get before they start to shop for their new home.

calculator and notepad placed on usa dollars stack
Mortgage pre-approvals are based on the buyer’s creditworthiness and can give a buyer an idea of how much they may be able to borrow

Pre-approval vs. pre-underwriting

Pre-approval versus pre-underwriting is another mystifying topic for many first-time buyers. Pre-approval and pre-underwriting mean essentially the same thing. Underwriting is usually the last step before your mortgage loan request can be approved. A loan underwriter typically does a deep verification of all of your financial information on behalf of the mortgage lender prior to final loan approval.  However, there is less risk of finding a problem that reduces how much you can borrow if an underwriter verifies your assets and income at the beginning of your mortgage application, so pre-underwriting provides more assurance than pre-approval (which may not be verified by a mortgage underwriter).

How does pre-approval work? 

You’ll start with a mortgage application. To do this, you’ll provide the lender with what you’ve decided is your budget for the purchase price of the home and how much you can put down as a down payment. Then, lenders analyze your creditworthiness to calculate how much you would qualify for and what your interest rate would be. As a result, you can present offers to sellers with more confidence for you and the seller that you’ll be able to close on the home.

When you should get pre-approved

Pre-approval is an important step in most competitive real estate markets. There are two different reasons for this. The first is emotional. Nothing is worse than falling in love with a home or neighborhood before discovering that your lender won’t actually provide you the mortgage amount you’d need to be able to buy that home or in that neighborhood. Next, getting a pre-approval letter before shopping is important on a practical level because most agents aren’t going to show you homes until you can prove how much you can afford and have a pre-approval letter in hand from your chosen lender.

Though it is certainly helpful everywhere, not every buyer in every market necessarily needs a pre-approval. If you can make a traditional all-cash offer, you won’t need a mortgage at all. And there are some markets where competition is cooling due to higher mortgage rates which makes sellers more likely to accept an offer with a financing contingency. 

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A mortgage pre-approval is the amount a lender feels comfortable lending to a borrower based on their creditworthiness but the final amount of the loan may be different, depending on the condition of the property

What documents do you need for pre-approval?

Lenders will use these documents to thoroughly examine your finances and determine how much they feel confident lending you.

Proof of income and employment verification

Lenders will verify your annual and monthly income by asking for W-2 statements for at least the last two years. They will also want to see current pay stubs and any documentation of extra income from places like:

  • Base income
  • Overtime income
  • Commissions
  • Rental income
  • Interest or dividends

If you’re self-employed, you can use your signed and filed tax returns to verify your self-employment income. In most cases, lenders will request the two most recent tax returns. Lenders will also call employers to verify employment status. If you’ve had a recent job change, a lender may contact your previous employer to verify your last day worked to make sure there is not a gap in employment that you may need to explain in a letter. Overall, lenders want to see consistency and stability in your career to ensure that you’re in a position to make payments on your mortgage once you close on the mortgage loan.

Proof of monthly expenses

Lenders are very interested in your debt to income ratio (DTI). Your DTI is the percentage of your monthly income that would go to any loan payments like car payments, student loans, and the mortgage, itself, once you are underwritten. Lenders will look at student loans, credit card bills, car payments and other forms of debt. DTI also takes into account monthly housing expenses, mortgage payments, homeowners insurance, property taxes, and any HOA dues. Lenders will assess your DTI with only the mortgage payment and then another assessment of all debts plus the mortgage payment. DTI maximums will vary by lender.

Proof of down payment

Lenders need to see that you have the cash to pay your down payment. In fact, they can’t determine how much to lend you, and at what rate, until they know how much you can put down. Your down payment is a percentage of your purchase price. Your earnest money deposit is typically applied toward your down payment and then you pay the remainder of your down payment at closing.   

Credit score and credit history

Your lender will obtain a credit report in order to pre-approve you. Conventional loans generally require credit scores of 620 or higher. Borrowers with credit scores of 760 or higher typically get the lowest interest rates. 

Generally, credit inquiries for pre-approvals may affect your credit score depending on how many other recent inquiries in your credit history there have been. 

Declarations

Your lender will look for any issues from past debts, such as seriously delinquent accounts,  charge-offs, or other public records on your credit report to determine your pre-approval. Things like previous foreclosures, bankruptcies, liens, and judgments may impact your chances of pre-approval.

Picking a lender

Mortgage lenders are not one-size-fits-all. Different lenders provide different loans and loan programs. Use our guide to learn about the difference between Conventional and Jumbo Loans, VA, USDA, and FHA loans. Then, learn about the pros and cons of fixed rate and adjustable rate mortgages

The general recommendation is shop around and get pre-approvals from two to three lenders before making your decision. That way, you can compare pre-approval loan amounts from different lenders. However, you want to avoid going higher than three simply because additional credit inquiries may begin to impact your credit score.

The steps to pre-approval

The first step of any pre-approval checklist is to get your finances in shape. Be honest with yourself about how your savings, credit score, and debts are looking. If you feel like you’re in a truly good spot to begin making purchase offers, the next step is gathering all of the pertinent financial information lenders want to see. This includes:

  • Information for bank accounts, retirement accounts, and investment accounts
  • Asset and property documentation
  • Income and employer details
  • Employer contact information
     

Next, do research to find up to three  lenders you wish to ask for a pre-approval. Remember that it’s okay to walk away from a lender without completing a pre-approval if you don’t feel that they can offer what you need. As the customer, you are approving them just as much as they are approving you.

What happens after pre-approval?

Once you’re pre-approved by a lender, you’ll receive a pre-approval letter that you can show to sellers as evidence that your buying power has been approved. Pre-approval letters are typically valid for a set period of time, usually between 30 and 90 days. That’s your shopping window! Don’t worry if you don’t find your home within this period. Your lender will be able to provide a reverification so you don’t have to go through the whole application process again, but be aware that if interest rates change in that window, your buying power may change with them if you were already at the limit of your DTI.

Why mortgage pre-approval is important

A mortgage pre-approval is important because it proves to sellers that you’re a serious buyer. In addition, it gives you the information needed to make a sound decision when looking at homes within your budget. Pre-approval is a relatively common financial tool that helps you break down at least one of the barriers that could come between you and making an offer on a home.

About the author: As the son of a construction contractor and a former property manager, Scott Dylan Westerlund knows how to keep the lights on and the water running. In addition to Flyhomes, he has written for Angi, HomeLight and HomeAdvisor. His hobbies include fixing things around the house, baking things up in the kitchen, and spending quality time with his wife and daughter just about everywhere.

Flyhomes Mortgage, LLC. 

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