If you’re in the market for a mortgage, you probably know that lenders won’t just shower you with money when you show up at their office with a smile and a heart-warming story about how you’ve found the perfect home. Nope, they want to know that if they give you a home loan, odds are good you’ll pay them back. And that’s where mortgage pre-approval comes in. Here’s everything you need to know about this crucial stage and how to ace it without a hitch.
What is mortgage pre-approval, anyway?
Mortgage pre-approval is that step in the process where a lender probes deep into your financial past, checking out your income, debts, credit score, and other factors that help it determine whether or not to give you a home loan—and how much money you stand to get. And that helps you set your sights on the right price range for a home.
“You need to know your buying power,” says Ray Rodriguez, New York City regional mortgage sales manager at TD Bank. Indeed, finding out your price range now can save you a lot of time and energy in the future.
“It’s emotionally crushing to find a home that you love and not be able to afford to purchase it,” he says.
Pre-approval vs. pre-qualification: What’s the difference?
Mortgage pre-qualification entails a basic overview of a borrower’s ability to get a loan. You provide a mortgage lender with information—about your income, assets, debts, and credit—but you don’t need to produce any paperwork to back it up. As such, pre-qualification is relatively easy and can be a fast way to get a ballpark figure of what you can afford. But it’s by no means a guarantee that you’ll actually get approved for the loan when you go to buy a home.
Getting pre-approved, in contrast, is a more in-depth process that involves a lender running a credit check and verifying your income and assets, says Rodriguez. Then an underwriter does a preliminary review of your financial portfolio and, if all goes well, issues a written commitment for financing up to a certain loan amount; this commitment is good for up to 90 or 120 days. So as long as you find your dream house and officially apply for your loan approval in that time period, you’re good to go!
Moreover, getting pre-approved is typically free, says Staci Titsworth, regional manager of PNC Mortgage in Pittsburgh. Expect it to take, on average, one to three days for your application to be processed.
Why pre-approval is important
A letter of pre-approval from a mortgage lender is akin to a VIP ticket straight into a home seller’s heart. Why? It’s proof you are both willing and able to purchase the home. Consequently, many sellers will accept an offer only from a buyer who has been pre-approved, which makes sense given that without pre-approval, there’s basically no guarantee whatsoever that the deal will go through.
What documentation you need
To get pre-approved, you’ll need to provide a mortgage lender with a good amount of paperwork. For the typical home buyer, this includes the following:
- Pay stubs from the past 30 days showing your year-to-date income
- Two years of federal tax returns
- Two years of W-2 forms from your employer
- 60 days or a quarterly statement of all of your asset accounts, which include your checking and savings, as well as any investment accounts such as CDs, IRAs, and other stocks or bonds
- Any other current real estate holdings
- Residential history for the past two years, including landlord contact information if you rented
- Proof of funds for the down payment, such as a bank account statement. If the cash is a gift from your parents, “you need to provide a letter that clearly states that the money is a gift and not a loan,” says Rodriguez.
Don’t make this pre-approval mistake!
Each time you apply for a new credit account—including a home loan—you trigger a “hard inquiry” on your credit, which dings your credit score, says Bill Hardekopf, a credit expert at LowCards.com. Your score can drop as little as a few points or up to 14 points, depending on your credit history and the number of other loans or credit accounts you’ve applied for in the past 90 days, says Jeremy David Schachter, mortgage adviser and branch manager at Pinnacle Capital Mortgage in Phoenix, AZ.
Because hard inquiries hurt your credit score, you will want to avoid applying for pre-approval with multiple lenders; otherwise, your score could decline to the point where you get locked out of buying a home. Still, it’s beneficial to meet with several lenders to explore your options conversationally, since some lenders offer more competitive interest rates and better service than others.
Shopping for a home before getting preapproved for a mortgage is the equivalent of walking into a grocery store without a wallet. Yet, many homebuyers don’t get a loan preapproval before the house hunt. So, what is a preapproval? For one, a preapproval is different from a prequalification.
Preapproval: The lender verifies the borrower’s information and documentation to determine exactly how much it would be willing to lend to that borrower.
Prequalification: The lender relies on information provided by the buyer to estimate how much the borrower could qualify for.
“The documents to get preapproved are the same documents that you would need to get a mortgage,” says Jordan Roth, mortgage specialist with Guardhill Financial Corp. in Glen Rock, New Jersey.
- Pay stubs.
- Last two years’ W-2s.
- Last two federal tax returns.
- Two months’ worth of bank statements of all types of accounts.
- Your credit report.
A preapproval is not a loan commitment, but it helps speed up the underwriting and loan approval process, Roth says.
Here are three reasons it’s better to get a mortgage preapproval before you go house hunting.
No. 1: The competitive market
Buyers often are eager to start looking at homes and tend to leave what they view as the boring, bureaucratic part of the homebuying process for last, says Michael Highfield, professor of finance and head of Mississippi State University’s department of finance and economics.
“But in this competitive market, any serious buyer should pursue a preapproval from a lender in advance to beginning a home search,” he says.
No. 2: No preapproval, no accepted offer
Real estate and loan professionals say it’s common to come across buyers who skip the preapproval process.
“It happens every day,” says Patty Da Silva, a real estate agent and owner of Green Realty Properties in Davie, Florida. “I can’t believe I still get offers today without a preapproval.”
As with many other agents and sellers, Da Silva says she rejects offers from buyers who don’t have preapproval letters from their banks.
“You have to have a preapproval and it must be a real preapproval where the lender has verified not just your credit, but bank statements, tax returns — and I call the lender to verify that,” she says.
No. 3: You need to know where you stand
Some buyers put off the loan application because they fear a lender may not approve them for the amount they plan to spend to buy the house, Highfield says.
“It’s like when people don’t go to the doctor for their annual checkup when they are afraid to find out what’s wrong with them,” he says. “That’s the same thing with getting preapproved.”
Others simply don’t want to share an abundance of private information with a lender until they actually find the home they want, he says.
You are beyond compare
Even if you pay your bills on time and earn about the same as the friend who just got that $300,000 mortgage, don’t assume you qualify for the same loan.
“A credit score difference of 700 to 680 can severely affect one’s ability in terms of down payment,” Roth says.
Getting preapproved before you shop for a loan also allows buyers time to fix unexpected errors on their credit reports.