Article originally published November 1st, 2016. Updated October 26th, 2018
One of the best things you can do to help ensure your best possible shot at getting the home you want is getting 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. With this meaningful promise, you’ll be likely to get the home you deserve due to your creditworthiness.
In the mortgage pre-approval process, the lender looks closely at your credit and verifies your income (unlike mortgage pre-qualification, in 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 mortgage pre-approval does not completely guarantee your loan will be approved and is generally only valid for 60-90 days (this timeline varies and can be verified by your lender).
What Does ‘Pre-Approval’ Mean?
Pre-approval means the lender is confident you have the ability to make the necessary down payment and an income that can sufficiently cover your future 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.
Confused by mortgage lingo? Check out our mortgage glossary.
The First Step
Before trying to get pre-approved for a home loan, check your credit reports and credit score. By taking this first step early on, you’ll have a better idea of what kinds of loans and interest rates you may qualify for, and you’ll have time to clear up any errors or problems you find on your credit reports before you start shopping for homes.
You can see two of your credit scores for free on Credit.com.
What Else You Need for a Mortgage Pre-Approval
The process of getting pre-approved for a mortgage is actually quite simple. All you have to do is provide your lender with the documentation they require, including:
- Income Information:Be prepared to supply your loan representative with pay stubs, tax returns, and W-2s from the previous two years, as well as documents that show additional sources of income (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 any of the other assets you have, aside from your income. This documentation can include bank account statements as well as information about investments you’ve made. 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 valid form of identification such as a driver’s license or passport, and you will need to provide your Social Security number for a credit check.
As we mentioned earlier, your lender will pull your credit information 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. Pre-approval typically takes two weeks to a month, but with automated underwriters it can sometimes be complete within a day, or even an hour. It all depends on the underwriters and the lender’s pre-approval process.
Within forty-five days, you can attempt to get pre-approved from multiple institutions, because the lenders will know that you’re only trying to buy one home.
Your credit report will only show a single hard inquiry so long as all of your lenders do their research during those forty-five days.
Why Is it Important to Get Pre-Approved?
When you’re ready to make a purchase offer on a home, both your real estate agent and the seller will want to see a pre-approval letter. This document proves you’ll likely be able to make the purchase and, therefore, can be taken seriously.
In a competitive housing market, sellers prefer a pre-approved buyer to a buyer who might be unable to close the deal. A pre-approval on a mortgage lasts 60 to 90 days depending on the lender.
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 the three basic stages of the mortgage application process: pre-qualification, pre-approval, and mortgage commitment.
Getting pre-qualified for a mortgage is an informal process where you are interviewed by a mortgage professional about your assets, income, and expenses. This process gives you a general idea of the price range you can afford. Pre-qualification really doesn’t bring you any closer to securing a mortgage, but it does give you insights you may not have had otherwise.
When you are pre-approved for a mortgage, a lender has looked closely at your credit reports, your employment history, and your income — and must then determine 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.
For your loan representative to submit your mortgage application for pre-approval, you must provide your last two years’ tax returns and W-2s, thirty days of pay stubs, sixty days of bank account statements, and a signed authorization to order your credit report.
The automated underwriting system will deliver a mortgage 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 approving 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 (meaning they need more documentation from you before they can make a decision), or denied.
Going after a pre-approved mortgage loan is crucial in your home-buying process. Even if you think people will trust your word and background, having that official documentation greatly increases the appeal of your purchase offer for most sellers.
If your first application gets rejected, it is possible to get a second opinion from a lender if you have a very good reason why you should be approved. By understanding and follow this mortgage pre-approval process, you’re one step closer to living in your dream home.
What is the difference between a mortgage pre-approval and a mortgage prequalification?
When you get pre-approved for a mortgage, it is a much more involved process than a prequalification because you will typically have to complete a mortgage application as well as pay the mortgage application fee. You will then need to supply the potential lender with all the required documentation, and your credit history and rating will then be taken into consideration.
For prequalification, you only have to supply the lender with an overall picture of your financial standing including information regarding your debt, income, and assets. There are usually no costs involved with this process and it can more often than not be done over the phone. There is no credit analysis for a prequalification, so there is not an in-depth look at your credit history and credit score. It is only based on information that the buyer supplies the potential lender which makes it easier to be denied later if any of the information you gave them was not accurate.
Should I Try to Get Pre-Approved Through More Than One Lender?
When trying to get pre-approved for a mortgage, you can consult up to three different lenders at a time but trying to consult with any more than that may end up proving to be a waste of time and money. Having more than one lender provides you with the opportunity to compare the rates that each lender is offering.
It also gives you the chance to explore other program options and test out the possible lender’s service prior to receiving a mortgage through them. Loan offers past the initial three lenders won’t vary much, so searching past them won’t help because you would have already been given the breakdown of information you need and any changes between more than the three lenders will be very minimal.
I received a pre-approval letter but was still denied. Why?
There are several reasons your pre-approval went through but was later denied. One of the most common reasons for this is a change of employment for the buyer. Many lenders require a consistent work history, and if the lender finds any gaps after you have been pre-approved, they may end up denying you. This is often found in the underwriting process.
Another reason you may be denied after receiving a pre-approval letter is a negative item that may have been found on your credit profile. While you do not need perfect credit to get pre-approved for a mortgage, lenders will still have their own set of requirements and guidelines. This is why it is so important that the buyer is aware of everything on their credit report when they get pre-approved by the lender.
It is imperative that the buyer then continues to pay bills on time and monitor their credit for any changes that could affect the credit score and the pre-approval process.
Incurring additional debts is another common reason you may be denied. For example, the buyer decides to take out a loan on a new car shortly after being approved for the mortgage loan. Adding this additional credit line and debt can have a significant impact on your debt to income ratio, and a potential lender may deny the mortgage if the debt to income ratio gets to be too high.
Finally, the lender’s loan requirements or guidelines may have changed. Perhaps a credit score of 620 would have worked at the time of pre-approval, but the lender may have changed their guidelines, and you now need a 640. Debt to income guideline changes and the amount of reserves the buyer needs to have available are two common guidelines that may change and cause a denial after a pre-approval.
Keep in mind that these are just a few of the most common reasons a buyer may experience a denial after receiving a mortgage pre-approval letter.
How does my credit rating affect the pre-approval process?
When you are seeking a mortgage pre-approval, you should not take on any additional lines of credit and don’t increase the debt you currently have because all of these can have an impact on your credit score. Your credit score and credit history will have an effect on the kind of loan programs and interest rates you will be given, as well as how much you will need to provide for your down payment.
Another big factor when pulling your credit is the debt to income ratio. The lender will not want this number to exceed forty percent.
How soon after a pre-approval can I begin to shop around for a mortgage?
While getting a pre-approval can help speed up the final mortgage approval process, there are still other factors that will affect the timeline. The pre-approval process may take one to three days, and after you are pre-approved, you will receive a pre-approval letter as evidence that you have a lender that has already verified your assets. The letter is typically valid for sixty to ninety days; however, it can be updated with reverification of the information.
Once you receive the pre-approval letter, you will want to start shopping around for the next forty-five days. Going beyond this timeframe may actually have a negative impact on your credit score because of the inquiries that will hit your credit profile.
Once you’re pre-approved, here are your next steps.