What is mortgage pre-approval?

Getting pre-approved is a key part of taking out a mortgage. When you get pre-approved, your lender gives you a letter stating that you are conditionally given the green light to take out a home loan.

A mortgage pre-approval tells you how much house you can afford, and it can strengthen your offer with sellers. Let’s look at how the pre-approval process works, and what you’ll need to get started.

What is mortgage pre-approval?

When you get pre-approved for a mortgage, your lender gives you a letter stating how much you’ve been conditionally approved to borrow. At the time of pre-approval, you may not have even started looking at potential houses — you’re just finding out what kind of mortgage you can afford.

Getting pre-approved is an important first step because it shows you what kind of price range you can afford. And most sellers won’t accept an offer on their home without a pre-approval letter.

What does a pre-approval letter say?

The pre-approval letter states that the lender is willing to loan you up to a set amount for a mortgage, assuming certain conditions are met. And the document is only valid for a specific period of time — pre-approval letters are typically good for 60 to 90 days, depending on your lender.

A pre-approval letter also states the type of loan you’re taking out. And it will outline the terms of the mortgage, like the potential interest rate, repayment period, and estimated monthly payments.

How to get pre-approved for a mortgage

Here are the steps you’ll take to get pre-approved for a mortgage:

Budget for a down payment: 

• Before you start the pre-approval process, you need to figure out how much you can spend on a down payment. Most lenders require at least a 3% down payment, but you’ll qualify for the best rates if you can put down between 10% and 20% of your target home price.

Check your credit: 

• Your lender will use your credit information to decide whether or not to pre-approve you for a mortgage. That’s why it’s a good idea to check your credit report first to correct any mistakes.

Pay off debt: 

• It’s also a good idea to pay down any outstanding debt, especially high-interest credit card debt. This will lower your debt-to-income ratio (DTI) and can help you qualify for a more expensive home.

Gather important documents: 

• Next, you can gather the documentation your lender will need. This includes your state-issued ID, pay stubs, federal tax returns, and bank account statements.

Comparison shop with multiple lenders: 

• Don’t accept the first pre-approval letter you receive — it’s a good idea to get pre-approval from at least three different lenders. Getting multiple offers gives you more options, and will help you find the best rates and terms on your loan.

Submit an application: 

• Once you’ve taken the previous steps to prepare, you can submit your mortgage application. Most lenders offer a way to do this online.
   

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Pre-approval vs. prequalification

Pre-approval and prequalification are similar in many ways, but they aren’t the same thing. In both cases, you receive a letter from your lender giving you an estimate of how much they are willing to lend you.

But when you get prequalified, you give your mortgage lender an estimate of your finances, income, and debt. The lender doesn’t pull your credit score or verify any of the financial information you’ve given them. So a prequalification letter carries very little weight when you make an offer on a home.

In comparison, when you get pre-approved, you actually go through the process of applying for a mortgage. Your lender checks your credit, reviews your finances, and gets a much more comprehensive view of your financial information.

Factors that affect pre-approval

Here are some of the main factors your lender will consider during the pre-approval process:

Employment and income: 

• When you apply for a mortgage, lenders want to see that you have a stable job and can afford to make your monthly mortgage payments. That’s why most lenders will request at least two years of W-2s or tax returns.

Assets and liabilities: 

• Your lender will also look at your current assets and liabilities since this helps them determine your total net worth.

DTI ratio: 

• Your DTI is your total monthly debt payments divided by your gross monthly income. Most lenders look for a DTI ratio of 43% or less.

LTV ratio: 

• Your loan-to-value (LTV) ratio compares your mortgage to the appraised value of the home. The higher the down payment you make, the lower your LTV ratio will be.

Credit score and history: 

• Your lender will check your credit score and pull your credit reports from the three major credit bureaus. They’ll look at things like your payment history and how many lines of credit you’ve taken out. This information helps them determine whether you’re a good candidate for a mortgage.

Mortgage pre-approval FAQ

What are the benefits of getting pre-approved?

One of the biggest benefits of getting pre-approved is that it helps you understand how much house you can afford. This information will help you as you begin looking at potential homes. It can also help you determine whether or not you should be trying to buy a house right now.

And sellers will take your offer letter more seriously if you’ve already been pre-approved for a mortgage. In most cases, sellers won’t accept an offer if you haven’t been pre-approved.

How long does mortgage pre-approval last?

How long your pre-approval letter lasts will depend on your lender, but in most cases, a pre-approval letter expires within 60 to 90 days. At that point, your lender will have to verify your financial information again.

How long does it take to get pre-approved for a mortgage?

It takes an average of seven to 10 days to get pre-approved for a mortgage. You can speed up the pre-approval process by having your financial documents ready to give to your lender.

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