As you search for a home, getting pre-approved for a mortgage can be an important step to take. Consulting with a lender and obtaining a pre-approval letter provides you with the opportunity to discuss loan options and budgeting with the lender; this step can serve to clarify your total house-hunting budget and the monthly mortgage payment that you can afford.
As a borrower, it’s important to know what a mortgage pre-approval does (and doesn’t do), and how to boost your chances of getting one.
- Going through the pre-approval process with several lenders allows a homebuyer to shop mortgage rates and find the best deal.
- A seller often wants to see a mortgage pre-approval letter and, in some cases, proof of funds to show that a buyer is serious.
- The first step is filling out a mortgage application and supplying your Social Security number so that the lender can do a credit check on you.
- You’ll also need to provide extensive documentation of job history, assets and liabilities, income tax returns, and more. Self-employed buyers may need to provide additional documentation.
- After reviewing your application, a lender will offer pre-approval, offer pre-approval with conditions, or deny pre-approval.
Pre-approval Is a ‘Physical Exam’ for Your Finances
Before lenders decide to pre-approve you for a mortgage, they will look at several key factors:
- Debt-to-income (DTI) ratio
- Loan-to-value (LTV) ratio
- Credit history
- FICO score
- Employment history
Think of a mortgage pre-approval as a physical exam for your finances. Lenders will likely poke and prod into all corners of your financial life as a way of trying to ensure that you’ll repay your mortgage.
Pre-qualification vs. Pre-approval
You’ve likely heard the term “pre-qualification” used interchangeably with pre-approval, but they are not the same. With a pre-qualification, you provide an overview of your finances, income, and debts to a mortgage lender. The mortgage lender then gives you an estimated loan amount.
In this way, a mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on a home. However, the lender doesn’t pull your credit reports or verify your financial information. Accordingly, pre-qualification is a helpful starting point to determine what you can afford but carries no weight when you make offers.
On the other hand, a pre-approval involves filling out a mortgage application and providing your Social Security number so that a lender can do a hard credit check. A hard credit check is triggered when you apply for a mortgage. For this process, a lender pulls your credit report and credit score to assess your creditworthiness before deciding to lend you money. These checks are recorded on your credit report and can impact your credit score.
By contrast, a soft credit check occurs when you pull your credit yourself, or when a credit card company or lender pre-approves you for an offer without your asking. Soft credit checks do not impact your credit score.
Also, you’ll list all of your bank account information, assets, debts, income and employment history, past addresses, and other critical details for a lender to verify. The reason for this is that, above all, a lender wants to ensure that you can repay your loan. Lenders also use the provided information to calculate your DTI ratio and loan-to-value (LTV) ratio,1 which are essential factors in determining the interest rate and ideal loan type.
All of this makes a pre-approval much more valuable than a pre-qualification. It means that the lender has checked your credit and verified the documentation to approve a specific loan amount. Final loan approval occurs when you have an appraisal done and the loan is applied to a property.
When to Get a Pre-approval
Mortgage pre-approval letters are typically valid for 60 to 90 days. Lenders put an expiration date on these letters because your finances and credit profile could change. When a pre-approval expires, you’ll have to fill out a new mortgage application and submit updated paperwork to get another one.
If you’re just starting to think about buying a home and suspect that you might have some difficulty getting a mortgage, going through the pre-approval process can help you identify credit issues—and potentially give you time to address them.
Seeking pre-approval six months to one year in advance of a serious home search puts you in a stronger position to improve your overall credit profile. You’ll also have more time to save money for a down payment and closing costs.
When you are ready to make offers, a seller often wants to see a mortgage pre-approval and, in some cases, proof of funds to show that you’re a serious buyer. In many hot housing markets, sellers have an advantage because of intense buyer demand and a limited number of homes for sale; they may be less likely to consider offers without pre-approval letters.
The Pre-approval Process
Applying for a mortgage can be exciting, nerve-wracking, and confusing. Some online lenders can pre-approve you within hours, while other lenders can take several days. The timeline depends on the lender and the complexity of your finances.
For starters, you’ll fill out a mortgage application. You’ll include your identifying information, as well as your Social Security number, so that the lender can pull your credit. Although mortgage credit checks count as a hard inquiry on your credit reports—and may impact your credit score—if you’re shopping multiple lenders in a short time frame (usually 45 days for newer FICO scoring models), the combined credit checks count as a single inquiry.
Here’s a sample of a uniform mortgage application. If you’re applying with a spouse or other co-borrower whose income you need to qualify for the mortgage, both applicants will need to list financial and employment information. There are eight main sections of a mortgage application.
1. Type of Mortgage and Terms of the Loan
The specific loan product for which you’re applying; the loan amount; terms, such as length of time to repay the loan (amortization); and the interest rate.
2. Property Information and Purpose of the Loan
The address; legal description of the property; year built; whether the loan is for purchase, refinance, or new construction; and the intended type of residency: primary, secondary, or investment.
3. Borrower Information
Your identifying information, including full name, date of birth, Social Security number, years of school attended, marital status, number of dependents, and address history.
4. Employment Information
The name and contact information of current and previous employers (if you’ve been at your current position for less than two years), dates of employment, title, and monthly income.
5. Monthly Income and Combined Housing Expense Information
A listing of your base monthly income, as well as overtime, bonuses, commissions, net rental income (if applicable), dividends or interest, and other types of monthly income, such as child support or alimony.
Also, you’ll need an accounting of your monthly combined housing expenses, including rent or mortgage payments, homeowners and mortgage insurance, property taxes, and homeowners association dues.
6. Assets and Liabilities
A list of all bank and credit union checking and savings accounts with current balance amounts, as well as life insurance, stocks, bonds, retirement savings, and mutual fund accounts and corresponding values. You need bank statements and investment account statements to prove that you have funds for the down payment and closing costs, as well as cash reserves.
You’ll also need to list all liabilities, which include revolving charge accounts, alimony, child support, car loans, student loans, and any other outstanding debts.
7. Details of the Transaction
An overview of the key transaction details, including purchase price, loan amount, the value of improvements/repairs, estimated closing costs, buyer-paid discounts, and mortgage insurance (if applicable). (The lender will fill in much of this information.)
An inventory of any judgments, liens, past bankruptcies or foreclosures, pending lawsuits, or delinquent debts. You’ll also be asked to state whether you’re a U.S. citizen or permanent resident and whether you intend to use the home as your primary residence.