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 trustworthiness.
In the mortgage pre-approval process, the lender looks closely at your credit and verifies your income (unlike mortgage 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 (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 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 score. 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 errors or problems you find on your 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 is actually quite simple. All you have to do is provide your lender with the documentation they require, including:
1. 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).
2. Asset Information: Your lender will also likely want to see information about 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).
3. Personal Information: You’ll need to bring a form of ID (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 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 month, but with automated underwriters it can sometimes be complete within a day, or even an hour. 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 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 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 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.
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, 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 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 of your trustworthiness 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.
This article has been updated. It was originally published November 1, 2016.