In a competitive housing market, it is extremely important to use every advantage possible to make your offer stand out from the rest. One of the simplest ways to do this is to get pre-approved for a mortgage. This shows a seller that you're a serious buyer and that a lender has pre-approved your ability to buy a home. In this article, we'll define what is a mortgage pre-approval, share what you need to get one, and describe the pre-approval process.
What is a mortgage pre-approval?
A mortgage pre-approval means that a lender has reviewed your credit, income, and ability to purchase a home. This is as close as you can get to having a mortgage without actually buying a property. Final approval cannot happen without a home that can secure the mortgage.
Until you have selected a property, your application remains as a pre-approval. Additionally, you cannot lock in an interest rate until you have a signed contract to purchase a home. The interest rate stays floating until after the contract is signed and you let your mortgage broker know that you are ready to lock in the rate.
What do you need for pre-approval?
To receive pre-approval for your mortgage, you'll need to provide numerous items for the loan officer to review and analyze. These documents include:
- Proof of income. Copies of your most recent paystubs from the last 30 days. Be ready to provide updated paystubs as you receive them. This verifies that you are still employed and that there are no changes to your income.
- Credit report. As part of the application process, you authorize the lender to receive a copy of your credit report. The lender may request your credit multiple times throughout the process to ensure that you haven't acquired any new debt.
- Bank statements. The bank statements verify your down payment, cash reserves, and that your paycheck has been deposited by your employer.
- Proof of funds for the down payment. If your down payment is not at your primary bank, you'll need to provide copies of those statements as well. Some home buyers plan to use money from their brokerage account, cryptocurrency holdings, or other assets to fund their down payment.
- Tax returns and supporting documents. Provide signed and dated copies of your personal (and business, if applicable) tax returns from the last two years to your lender. Additionally, share your W-2 forms that match your tax returns.
The pre-approval process is very similar to the standard application process. The only difference is that you are not yet under contract to buy a home. These are the most common steps that homebuyers make when getting a mortgage pre-approval:
Review your credit report ahead of time
If you haven't reviewed your credit report lately, you could be in for a surprise. A study by the Federal Trade Commission (FTC) found that about 1 in 4 consumers had at least one error in their credit report. Federal law allows you to request one free copy of your credit report from all three credit bureaus once per year at AnnualCreditReport.com.
You should request copies of your credit reports at least 2 to 3 months before starting your home buying process. This gives you time to analyze the reports and dispute any incorrect information. From the date your dispute is received, credit bureaus have 30 days to investigate and correct your claim. Then, it may take a few days more for them to update your credit file.
Think about how much home you can afford
This involves being realistic with how much of a down payment you have and what payment will work with your budget. Many websites offer mortgage calculators so you can adjust the variables of interest rate, term, and loan amount.
Assemble your financial documents
All lenders will eventually need your financial information, so it is best to compile and organize that information ahead of time. Since many lenders are out of state or in a distant office, your best bet is to save these files digitally as PDFs.
Shop around for the best combination of rates, fees, and terms. You can speak with multiple lenders individually or use a comparison website that seeks out the best rates from a range of lenders.
Choose a lender and submit an application.
Once you've found a lender that offers the best loan for your situation, submit an application through their online portal. Typically, you won't have to submit any documents until you've been prequalified.
Provide all requested documents
Based on what is found on your credit report and your chosen loan type, amount, and terms, the lender will let you know which documents they need. Typically, you shouldn't provide any additional documents that haven't been requested. Doing so could lead to unexpected questions and the possibility of your loan being declined.
Continue your home search
During the mortgage pre-approval process, you should be searching for homes. Waiting until you get pre-approval can lead to unnecessary delays in buying your property.
Avoid unnecessary changes to your finances
Your pre-approval is based on your current financial and credit score. Do not make any changes without speaking with your loan officer first. It is wise to delay applying for any new credit (e.g. car loan, credit card) until after you have closed on your home purchase. Additionally, avoid large purchases on your credit cards that can drive up utilization and lower your score.
Pre-Qualification vs. Pre-Approval
A pre-qualification is a streamlined version of the mortgage pre-approval process. It requires minimal information, a credit inquiry, and generally is available the same day.
To receive your pre-qualification, you'll provide estimates of your income, down payment, and the desired mortgage amount for the lender to prequalify you. In essence, this provides a rough estimate as to what amount the lender will approve you for when you are ready to proceed.
Take note that a pre-qualification is non-binding. It could be withdrawn if your supporting information does not match your application when you move forward with the loan.
Pre-approved vs. approval
You can get pre-approved by submitting all of the required information, but your mortgage will not be approved until after you've signed a contract to purchase a home. Once the contract is signed, you can lock in the rate and terms of your mortgage. Additionally, the lender will request an appraisal from an independent third party to provide a valuation of the home you wish to purchase. That appraisal determines the maximum loan amount that the bank will lend and the minimum required down payment for you to meet the terms of your contract.
When underwriting is finished reviewing your documents, the appraisal, and the contract, you'll receive final approval of your loan. This means that the bank is "ready to close." Your lender will schedule a time for you to sign the loan documents and finalize the loan. The entire process usually takes between 15 and 45 days, depending on the housing market conditions and your lender. As soon as the bank funds the loan, you are now the proud owner of your new home.
When to get pre-approval
You should get pre-approved before you start looking for homes. Because the lender needs to review your financials and credit report, it can take up to two weeks to provide a pre-approval letter.
While your application is being reviewed, if you find the home of your dreams, you may miss out on it. Even if you have been prequalified, any offer that you submit will not be as strong as other bidders who already have a pre-approval letter. Waiting until you receive pre-approval also ensures that you don't waste time looking at homes that are above your budget.
Frequently asked questions
Does pre-approval affect your credit score?
Yes, because the lender is pulling your credit report, a hard inquiry will post to your credit report. Most lenders pull your credit report and score from all three bureaus. The lender typically uses the middle score to determine rates and programs that you qualify for. Each inquiry usually drops your credit score 3 to 5 points, but the impact is short-lived. Unless your credit score is on the edge of qualification, it shouldn't affect your ability to be approved.
How far in advance should I get pre-approved?
It is wise to start the pre-approval process about two weeks before you start looking at homes. This gives the lender adequate time to review your credit report and financial information to pre-approve your loan request. Remember that most pre-approvals are only good for 60 to 90 days, so don't request them too early either.
How long does pre-approval last?
Mortgage pre-approvals generally expire after 60 to 90 days because a borrower's finances may have changed during this timeframe. However, every lender is different, so ask your loan officer about the lender's expiration policy. If you haven't found a home during this time, most lenders will let you renew or extend your pre-approval by providing updated copies of your financial documents and agreeing to a new credit inquiry.
Why should I get pre-approved?
Getting pre-approved speeds up the process of loan approval. This shows the seller that you are committed to buying a home and the bank has reviewed your income, credit, and down payment information. With a pre-approval, you stand out from the rest of the bidders and can close faster on the purchase.