One of the best things you can do to help ensure your best possible shot at getting the home you want is to get a pre-approved mortgage loan. Mortgage pre-approval is basically a promise from the lender that you’re qualified to borrow up to a certain amount of money at a specific interest rate, subject to a property appraisal and other requirements.
In the mortgage pre-approval process, the lender looks closely at your credit and verifies your income (as opposed to pre-qualification, for which your information is not verified). If you’re granted a pre-approved mortgage loan, the lender gives you a pre-approval letter, which says your loan will be approved once you make a purchase offer on a home, and submit the following documents: the purchase contract, preliminary title information, appraisal, and your income and asset documentation. Keep in mind, though, that pre-approval does not completely guarantee your loan will be approved and is generally only valid for 60-90 days (but this varies and should be verified by your lender).
What Does ‘Pre-Approval’ Mean?
Pre-approval means the lender is confident you can make a necessary down payment and your income is sufficient to cover mortgage payments. At this stage, only one concern remains. The lender needs to make certain the property’s value offers sufficient collateral in relation to the loan amount. In other words, the home must be appraised for an amount more than, or equal to, the purchase price.
The First Step
Before trying to get pre-approved for a home loan, check your credit reports and credit scores. By taking this first step early on, you’ll have an idea of what kinds of loans you may qualify for, and you’ll have time to clear up any mistakes or problems you find on your reports before you start home shopping.
You can get copies of your free annual credit reports from the three main credit bureaus once a year when you visit AnnualCreditReport.com. You can also see two of your credit scores for free, updated every 14 days, on Credit.com.
What Else You Need for a Mortgage Pre-Approval
The process of getting pre-approved is actually quite simple. All you have to do is provide your lender the documentation that they require, which includes the following:
- Income Information: Be prepared to supply your loan representative with pay stubs, tax returns and W-2s from the previous two years, and documents to show other sources of income (which could include a second job, overtime, commissions and bonuses, interest and dividend income, Social Security payments, VA and retirement benefits, alimony or child support).
- Asset Information: Your lender will also likely want to see information about the other assets you have, aside from your income. This can include bank account statements as well as information about investments you have. If a family member or friend is giving you money, you’ll also want to bring documentation of this information (including a gift letter, which shows the money is not a loan).
- Personal Information: You’ll need to bring a form of ID (whether a driver’s license or passport) and will need to provide your Social Security number (for a credit check). As we mentioned earlier, your lender will also be looking at your credit, but this is information they will pull on their own, so you don’t have to worry about bringing it with you.
Beyond this, the ball is in the underwriter’s court.
Why Is it Important to Get Pre-Approved?
When you’re ready to make a purchase offer, both your real estate agent and the seller (if you aren’t building) will want to see a pre-approval letter. This proves you’ll likely to be able to make the purchase and, therefore, can be taken seriously. In a competitive housing market, sellers prefer a pre-approved buyer to those who, for all anyone knows, might be unable to close the deal.
Understanding the Mortgage Loan Application Stages
Before you roll up your sleeves and look into the details of getting pre-approved, you should first understand all three basic stages of the mortgage application process: pre-qualification, pre-approval and mortgage commitment.
Getting pre-qualified is an informal process where you are interviewed by a mortgage professional about your income and expenses. This gives you a general idea of the price range you can afford. It really doesn’t bring you any closer to securing a mortgage, but does give you insights you may not have otherwise.
When you are pre-approved for a mortgage, it means a lender has looked closely at your credit reports, your employment history and your income — and has then determined which loan programs you qualify for, the maximum amount you can borrow and the interest rates you will be offered. Be aware, however, that your loan representative is not the one who will ultimately approve your loan. That is the underwriter’s role, and these days underwriting is automated.
In order for your loan representative to submit your application for pre-approval, you must provide your last two years’ tax returns and W-2s, your most recent pay stubs, bank account statements, and a signed authorization to order your credit report. The automated underwriting system will deliver a pre-approval letter within minutes, and will list any conditions that need to be met for full approval.
A lender will issue a loan commitment after it has approved both you and the property you intend to purchase. Having examined all the necessary documentation to verify your ability and willingness to repay the loan, your loan representative will submit your complete application to the underwriter. The underwriter will return one of four decisions: approval, approved with conditions, suspended (which means they need more documentation from you before they can make a decision) or denied.