Getting pre-approval for a mortgage

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August 4, 2020

Wondering what it takes to get pre-approved for a mortgage? What does that even mean? Figure out what you need to know about this crucial process when looking at homes.

What’s a mortgage pre-approval?
When should you get pre-approved
Making an offer without a pre-approval letter
What you should know about the pre-approval process
Can a mortgage still be denied after you get pre-approval?
Do you have to get your loan through the lender that pre-approved?

What’s a mortgage pre-approval?

A mortgage pre-approval is a conditional, preliminary approval for a mortgage. It’ll include an estimated interest rate and a maximum amount that the bank is willing to loan you. Most sellers require the buyer to have a mortgage pre-approval letter from a lender before they’ll sell them the property, along with proof of funds. These letters are also often marketing tools used by lenders, as buyers shop around for a mortgage. Approval letters are usually valid for 60 to 90 days.

Pre-approval vs. mortgage commitment letter

A mortgage pre-approval letter is not the same thing as being approved for a mortgage, which involves a commitment letter. Loan officers write the pre-approval letters, which are included in the buyer’s purchase agreement, assuring the seller that the buyer has met basic criteria for obtaining the loan, including income, good credit, etc.

Underwriters provide a mortgage commitment letters, which state that the buyer may now close a deal on a piece of property. Sometimes, these letters will include some conditions that the buyer has to meet or agree too. Many things can come up between the pre-approval and the actual underwriting of the loan. Things like changes to the buyer’s circumstances or a low property appraisal on the house in question can make the pre-approval letter void.

Guide to pre-approval process for home buyers

What’s the difference between being pre-approved and pre-qualified?

Pre-approved and pre-qualified do not mean the same thing, even if they’re sometimes referenced interchangeably. Pre-qualification is just an estimate for how large of a mortgage you can be approved for. It’s based on a brief overview of your finances, debts, and income. To get pre-approved for a loan, however, is to get a conditional offer from a lender for a mortgage. 

The latter requires the borrower to fill out a mortgage application so the lender can do a hard credit check on you, which doesn’t happen with pre-qualification. There’s also a much more thorough investigation into your assets, income, and debt-to-income ratio. This makes pre-approval a far more valuable step, with pre-qualification being something that you do before a pre-approval

When should you get pre-approved

If you’re shopping around for a home and you think you might have some trouble getting a mortgage, this process will help identify credit issues that you need to work on before buying a home. Typically, going through the pre-approval process one year (or even just six months) ahead of a home purchase will help you figure out what you need to do. 

These approvals usually expire between two and three months from the day they’re issued. If a buyer waits longer than that, they must fill out another application and provide updated information and paperwork.

Making an offer without a pre-approval letter

The majority of sellers will want to see a pre-approval letter before they take an offer seriously. Pre-approval will show the seller that you’re serious and that there’s a lender that is willing to back you if they do sell it to you. 

It’s technically possible to make an offer without one, but it’s best to keep in mind that the seller is usually in a better position than the buyer. Especially in hot housing markets, you may be competing against many other buyers in a limited market of available homes. Having the letter will make your offer stand out.

What you should know about the pre-approval process

Determine your pre-approval amount

There are all sorts of mortgage calculators available online for consumers to use to get an idea of what their mortgage application might yield. Some major banks or other lenders offer them, which will give you a rough estimate based on the information you provide. Both Chase Bank and Discover offer them.

These aren’t the same as getting an actual pre-approval from a specific lender, which will involve one’s truly documented expenses and income. However, the calculator can give you a rough idea about the maximum amount of money you may be offered.

Choosing your lender: broker vs. bank

Banks fall under the category of “direct lender” when it comes to getting a mortgage, which includes other financial institutions like savings and loans associations. A mortgage broker is a firm that can help you compare and contrast different offers from different lenders. Some lenders work exclusively with brokers. 

The broker makes money by charging a fee based on the size of the mortgage. Historically, this field was loosely regulated and brokers had bad reputations. However, changes have happened over the years and there are more protections now. Brokers can serve as a good middleman with lenders if you don’t want to deal with them directly, and don’t mind paying an additional fee.

Your mortgage pre-approval checklist

You’ll need five things to get pre-approved for a mortgage:

  1. Proof of your assets.
  2. Proof of your income.
  3. A good credit score.
  4. Employment verification.
  5. Other documents, such as driver license, social security card, etc.

Your W-2, along with any bank and investment account statements will usually suffice for proof of assets and income. You need to prove that you have money for the down payment and closing costs, along with the means to pay your mortgage every month. This process also requires a hard credit check. Typically, borrowers will need a credit score of at least 620 to get pre-approved for most conventional loans. Federally-backed FHA loans will allow borrowers to put down as little as 3.5% if they have a credit score of at least 580. 

Employment verification usually involves the borrower’s pay stubs and calling the borrower’s employer to verify current employment and salary. The lender may also contact previous employers if the borrower changed jobs very recently. This step requires much more paperwork about your income and/or business if you are self-employed. The stability of your income, the location of your business, the kind of business you run and the demand for the product your selling, and the overall financial strength of your business will be taken into account. 

Finally, make sure you have any identifying documents that you might need, including a driver license and social security card. The lender may ask you for other documents as well, but these two—along with the borrower’s signature—are most commonly asked for. This is so they can do a credit check on you.

Must-have documents to start pre-approval process

The mortgage pre-approval process requires a lot of paperwork. Lenders are most likely to ask for the documents listed below. They address the different factors looked into when determining whether or not to give you a loan. 

Income

  • Any W-2’s you have. 
  • 2 most-recent pay stubs.
  • Any 10-99’s you have.
  • Documents about any passive income from real estate, if you own rental properties.

Assets

  • Bank statements.
  • Retirement and brokerage accounts including IRAs, 401Ks, investment accounts, and CDs.

Debts

  • Monthly statements for any debts you have.
  • Real estate debt, if you currently have another mortgage.

Other

  • For renters, documentation proving that you paid your rent over the last 12 months.
  • Divorce papers, and any court orders about child support or alimony.
  • Information on past bankruptcies and foreclosures.
  • Gift letters from anyone who gives you money for the down payment if that is the case (this is somewhat rare and usually not asked for).
Everything you need to know about mortgage preapproval

Can a mortgage still be denied after you get pre-approval?

Unfortunately pre-approval doesn’t necessarily guarantee a commitment letter. It is key to remember that these letters are conditional only, despite being helpful to the buyer during the purchase agreement stage. 

Changes in income, debt level, and credit score can all have an impact on a change in circumstance and offer. Ways to avoid this is by not tapping into your savings, not switching jobs, doing anything that could reduce your assets or increase your debts. Increasing your savings at this time also really helps. 

Do you have to get your loan through the lender that pre-approved?

Being pre-approved does NOT mean you have to go through that specific lender in order to get a mortgage. It’s important to remember that these letters are conditional, so you have the ability to shop around for the rates and terms that work best for you. In fact, most people do quite a lot of shopping around from lender to lender. Remember: the more lenders you contact, the clearer picture you’ll have of what the best deal you can get is. 

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