What is mortgage pre-approval?
Mortgage pre-approval is when a lender determines you’re qualified for a home loan.
Your pre-approval letter includes the specific amount you’re approved for (your home buying budget), as well as the interest and rate and loan term at which you’re qualified to take out the loan.
To get pre-approved, lenders evaluate your credit, verify your income, and assess your full financial picture.
This is different from a mortgage pre-qualification, which requires no documents and won’t give you the backing you need to make an offer on a house.
It’s crucial to get pre-approved before you try to make an offer on a house, or even start house hunting. Here’s how to do that.Start your mortgage pre-approval today (Oct 28th, 2020)
In this article (Skip to…)
- How to get pre-approved
- Pre-approval versus pre-qualification
- Mortgage pre-approval FAQ
- Can you get denied after pre-approval?
- Common pre-approval mistakes to avoid
How to get pre-approved for a mortgage
The exact pre-approval process varies by mortgage lender. But it generally involves a loan application, credit check, and various forms of documentation. Many lenders let you do the whole thing online. But if you want, you could also get pre-approved over the phone or in person.
Step 1: Complete a home loan application
Your lender will usually give you the option of completing your loan application online, over the phone or in person. Online applications typically take 10-20 minutes to complete.
The loan application, also known as Form 1003, asks for your personal information, financial information and loan information.
After your application is completed, the lender will pull a three-bureau credit report known as a tri-merge. This report shows your credit scores and your credit history.
Note: You can apply and get pre-approved with any lender you wish. You can even get pre-approved by more than one lender to find the best offer. Pre-approvals are non-binding, and you’re free to switch before taking out the loan.
Step 2: Document your income and assets
Your lender will require documentation to support the information on your loan application. (This is what makes pre-approval different from pre-qualification.)
Typically, your lender will require these documents for pre-approval:
- Last two year’s W-2s and/or 1099s
- Last two year’s tax returns
- Profit & Loss statement if self-employed
- Paycheck stubs for last 30 days, if applicable
- Bank accounts, retirement accounts and other asset accounts
- Divorce decree, separation agreement, if applicable
- Contact information for your landlord(s) for last two years, if applicable
To speed up the pre-approval process, it helps to have these documents on hand before you get started. Some lenders are able to pull documents directly from your employer and bank, but not all.
Step 3 – Your mortgage lender completes the pre-approval
Once you’ve filled out your pre-approval application, turned in your documents, and paid your application fee (if applicable), your work is done. The last step (underwriting) is up to your lender.
Most lenders use a universal automated underwriting system (AUS) to pre-approve customers for home loans. AUS is a technology-driven underwriting process that provides a computer-generated loan decision.
In other words: You don’t have to wait for a human to read through all those documents and approve you.
By using automated underwriting, lenders have the capability to provide near-instant results that can generally take up to 60 days to complete via manual processing.Start your mortgage pre-approval today (Oct 28th, 2020)
Pre-approval versus pre-qualification
It’s easy to confuse mortgage pre-approval and pre-qualification (especially because lenders often make up their own names for these steps). But you shouldn’t mix the two up. A pre-approval letter gives you verified home buying power — whereas a pre-qualification letter is just an estimate of what you can afford.
Getting pre-qualified involves an informal interview with a mortgage lender. Your lender typically asks you about your credit, income, assets, and debts. Then it gives you a general idea of the price range you can afford, and how much cash you’ll need to purchase a home.
Pre-qualification is incredibly helpful in figuring out what you can afford. But since none of your financial information has been verified yet (only stated), a pre-qualification letter won’t be taken seriously by a home seller.
To actually make an offer, you need a pre-approval letter.
Getting pre-approved is a more extensive look into your credit report, your employment history, and your income. Pre-approval requires all the same information as pre-qualification, but the lender goes one step further by actually verifying the information you provided.
To get a pre-approval letter, you’ll complete a full loan application. That includes submitting documents like W2s, bank statements, and a credit check, to support the information you provided verbally.
With a pre-approval letter in hand, you’re free to make an offer on a house within your price range. The seller now has proof that you’re good for the amount stated.
Mortgage pre-approval FAQ
Mortgage pre-approval involves a “hard” credit pull, which can affect your credit score. But the impact is usually very small. According to myFICO, one credit inquiry will take less than five points off your FICO score. (For perspective, the full scoring range is 300-850.) And if you get multiple pre-approvals within 2-4 weeks of one another, only one “hard pull” will be counted against your credit score.
Mortgage pre-approval letters are typically valid for anywhere from thirty to ninety days. However, a pre-approval can be updated and extended if the lender re-checks your information. The pre-approval letter serves as evidence that you have a lender that has reviewed your credit, as well as verified your income and assets.
Getting pre-approved is similar to getting pre-qualified, except that all the information you provide has to be backed up by documentation. With a pre-approval, you typically have to complete a full mortgage application and maybe pay an application fee. You will then supply the lender with financial documentation (like pay stubs and W2s), and your credit history and score will be pulled.
Pre-approval is free with many lenders. However, some charge an application fee, with average fees ranging from $300–$400. These fees may be credited back toward your closing costs if you move forward with that lender. However, since pre-approval does not tie you to a lender, we’d recommend starting out with one that offers free pre-approval. You can always choose a new lender later.
The timeframe for getting pre-approved varies by lender. Most lenders take one to three days. Banks and credit unions may take up to 30 days. For the fastest pre-approval, look for a lender that specializes in digital loan applications, like Rocket Mortgage, Better.com, or loanDepot.
Most lenders recommend getting pre-approved three to six months before you plan to buy a home. If you foresee roadblocks for your loan (like having to improve your credit score or pay off debts), you may want to get your first pre-approval up to a year prior to your home purchase. That should give you enough time to clean up your credit report and build a solid down payment.
Pre-approval letters vary from lender to lender. They typically include the purchase price, loan program, interest rate, loan amount, down payment amount, expiration date, and the property address. The letter is typically submitted with your offer. Some sellers might also request to see your bank and asset statements.
Can you get denied after being pre-approved for a mortgage?
Yes, you can get denied for a mortgage loan even after being pre-approved for it. There are a number of reasons this could happen.
For example, if something hits your credit report and lowers your scores, it could push you outside of the lender’s qualification guidelines.
Or if you lose your job prior to closing on the loan, you’ll likely be denied. That’s because the lender can no longer verify you’ll be able to make your payments.
And common mistakes could affect your pre-approval, too — like running up too much debt before the loan closes.
Basically, anything that significantly impacts your financial picture could impact your mortgage pre-approval.
Also, a pre-approval typically happens prior to finding a home. As such, your home must also be approved by the lender.
Common pre-approval mistakes
Any changes to your mortgage application after getting pre-approved could affect your interest rate or home buying budget.
The best thing you can do between the time you get pre-approved and your closing date is to maintain status quo — keep everything the same from a financial standpoint.
- Keep the same job
- Delay major purchases that could impact your credit or debt ratios
- Protect your savings account
- Gather documentation for any large deposits into your bank accounts
If you do have any major changes in any of these areas, be sure to contact your lender as soon as possible.
Otherwise, by holding steady, you should be able to keep your mortgage pre-approval intact and your home offer secure.Start your pre-approval with a top lendert today (Oct 28th, 2020)