What Is Mortgage Pre-Approval?

Mortgage pre-approval is a process where a lender reviews your financial situation—such as your income, a soft credit inquiry (which will not affect your credit score), and debt-to-income ratio—and gives you an estimate of how much you can borrow for a home loan. This is different from pre-qualification, which does not need to be done by a lender, and which is a more informal process that only gives you a general idea of your borrowing capacity based on self-reported information.

With pre-approval, the lender does a preliminary check of your financial health, making a more reliable indicator of what you can afford. You’ll receive a pre-approval letter that states the loan amount you qualify for, the type of loan, and the interest rate, all of which are usually valid for 60 to 90 days. It is customarily required to be included as part of the documents sent to listing agent for seller when making an offer.

Why Mortgage Pre-Approval Is a Game-Changer

1. Sets a Realistic Budget
   • Know your buying power: Pre-approval helps you understand what price range you should be looking at. This prevents you from falling in love with homes that are out of your budget and saves you time by narrowing down your search to properties you can afford.
2. Strengthens Your Offer
   • Shows You’re a Serious Buyer: In a competitive housing market, real estate agents and sometimes even sellers will require that you have a pre-approval letter before setting up a showing. Having a pre-approval letter shows that you’re a serious buyer whose already started getting financing in place.
3. Identifies Potential Issues Early
   • Resolve Problems Ahead of Time: The pre-approval process can uncover issues, such as a low credit score or high debt levels, that could prevent you from securing a mortgage. Addressing these issues before you start house hunting gives you time to improve your financial situation.
4. Speeds Up the Home Buying Process
   • Move Quickly When You Find ‘The One’: When you find your dream home, you’ll want to move fast. Since your financial details have already been reviewed, getting final approval and closing the deal can happen more quickly, giving you an edge over other buyers.
5. Gives You Leverage in Negotiations
   • Confidence in Negotiations: Knowing what the maximum you can borrow is, gives you confidence during negotiations, as you’ll be able to make strong, informed offers and counteroffers if necessary.

How to Get Pre-Approved for a Mortgage

Here’s a step-by-step guide to help you through the mortgage pre-approval process:

1. Check Your Credit Score
   • Understand Your Credit Health: Your credit score is a key factor in getting pre-approved. Check your score and address any errors or outstanding issues before applying. Lenders typically prefer scores of 620 or higher, but there are options for lower scores.
2. Gather Your Financial Documents
   • Be Prepared: Lenders will ask for various documents, including:
     • Recent pay stubs
     • Tax returns and W-2 forms for the past two years
     • Bank statements for the past few months
     • Information about any debts (like credit cards, student loans, etc.)
     • Identification (driver’s license, Social Security number)
3. Choose a Lender
   • Shop Around: It’s a good idea to get pre-approved by more than one lender to compare interest rates, loan terms, and fees. This can save you money in the long run and help you find a lender you feel comfortable working with. I can connect you with Guaranteed Rate Affinity, our in house lender and explain the additional benefits of going with them.
4. Submit Your Application
   • Complete the Process: Once you’ve chosen a lender, fill out the mortgage pre-approval application. This may involve a hard credit inquiry, which can temporarily affect your credit score, but it’s a necessary step in the process.
5. Review Your Pre-Approval Letter
   • Understand the Details: After the lender reviews your application, they’ll issue a pre-approval letter outlining the loan amount, interest rate, and any conditions. Read it carefully and ask questions if anything is unclear.
6. Maintain Your Financial Health
   • Stay Consistent: After getting pre-approved, avoid making major financial changes, such as taking on new debt or changing jobs, as these could impact your final approval.

What’s Next After Pre-Approval?

Once you’re pre-approved, you’re ready to start house hunting with confidence.

Remember, pre-approval isn’t a guarantee of final loan approval. After you’ve made an offer on a home and it’s been accepted, the lender will conduct a thorough review of your financial situation, this is know as Loan Underwriting. It includes  appraising the property, and re-evaluate your finances by requesting  most recent bank statements and checking for any last-minute changes on credit report. That’s why it’s so important to maintain the same financial profile you had when you were pre-approved,  If everything checks out, the lender will issue a final approval, clearing the way for closing,