Getting pre-approved for a mortgage is one of the most important first steps for homebuyers. Mortgage pre-approval provides you with a pre-approval letter that states the loan amount, interest rate, and terms that a lender is willing to offer, based on a review of your finances. This guide will cover everything you need to know about mortgage pre-approvals including:
- What is Mortgage Pre-Approval?
- Benefits of Getting Pre-Approved
- Pre-Approval vs. Pre-Qualification
- The Mortgage Pre-Approval Process
- Pre-Approval Criteria and Requirements
- How to Get the Best Mortgage Rates
- 5 Common Pre-Approval FAQs
Having a mortgage pre-approval in hand puts you in a much stronger position as a buyer to make compelling offers and close quickly when you find the right home.
What is Mortgage Pre-Approval?
Mortgage pre-approval is a more comprehensive review of your finances, income, debts, and credit report by a lender compared to pre-qualification. It results in a formal pre-approval letter that makes you a much more attractive buyer to sellers.
Here’s what mortgage pre-approval entails:
- Review of Income & Assets – Provide pay stubs, tax returns, bank statements to confirm your stable income and down payment funds.
- Credit Check – Your credit report is pulled and reviewed for overall credit health and score.
- Debt-to-Income Calculation – Your total monthly debts compared to gross monthly income. Typically around a 43% ratio is acceptable.
- Downpayment Review – Lender confirms you have the funds for any downpayment required.
- Home Price Determination – Based on the above, lender specifies the maximum loan amount and home price you can afford.
- Pre-Approval Letter – Formal letter stating the loan amount, rate, and terms you are pre-approved for.
The pre-approval letter gives you buying power when negotiating for homes and sets you up for a smooth closing.
Benefits of Getting Pre-Approved
Pre-approval comes with many advantages compared to just getting pre-qualified. Here are some of the top benefits:
- Competitive Buyer – Sellers will take your offer more seriously knowing you are qualified and able to close quickly.
- Lock In Rates – Interest rates are locked for 30-90 days typically while you search for a home.
- Faster Closing – Much of the documentation and underwriting is done upfront for a speedier closing.
- Strong Negotiation Leverage – Pre-approval shows sellers you are a serious buyer who has their financing lined up.
- Peace of Mind – You know exactly what you can afford and reduces stress during the home search process.
- Act Fast on Finding a Home – Being pre-approved allows you to make an offer right away when you find the perfect place.
You’ll be in a much stronger position as a homebuyer if you secure a formal mortgage pre-approval letter before starting your search.
Pre-Approval vs. Pre-Qualification
Many homebuyers get pre-qualification and pre-approval confused. Here’s the key differences:
- Very basic review of income, debts, and credit
- No formal credit check or documentation
- Identifies price range you may qualify for
- Not a guarantee of approval or rates
- In-depth review of your financials and credit check
- Documents like tax returns and paystubs provided
- Loan amount, rates, and terms provided in writing
- Strong indication you’ll get the mortgage when buying
While pre-qualification gives you an estimate, pre-approval is the much safer route giving you confirmed buying power for your home search.
The Mortgage Pre-Approval Process
Here are the typical steps to getting a mortgage pre-approval:
1. Compare Lenders
- Get rate quotes from multiple lenders
- Consider banks, credit unions, online lenders
- Check their mortgage pre-approval criteria
2. Submit Application & Documentation
- Formally apply for pre-approval
- Send income docs, tax returns, bank statements
- Provide property address once under contract
3. Credit Check and Review
- Your credit report will be pulled and reviewed
- Any credit issues or red flags are addressed
4. Verify Assets & Income
- Lender will confirm downpayment funds
- Income will be verified via your documentation
5. Receive Pre-Approval Letter
- Official pre-approval letter is issued
- Outlines loan amount, rate, term length
6. Shop for Your Home
- Now start touring homes and making offers
- Must find home within specified timeframe
Move quickly when you find the right home so your locked rate and mortgage approval doesn’t expire!
Pre-Approval Criteria and Requirements
To get your mortgage pre-approval, lenders look for:
- Minimum credit scores vary by lender, often around 620+
- Scores of 720+ get the very best rates
- Long history of responsible credit use
- Tax returns, recent pay stubs, documentation of your income
- Stable employment history with 2+ years in same field
- Bank statements showing you have 5-20% downpayment amount
- Must be able to document source of downpayment funds
Total Monthly Debt
- Your total monthly debt payments after adding projected mortgage payment
- Debt-to-income ratio usually below 45% to qualify
Sufficient Home Equity
- If refinancing, enough equity must be in the home to qualify
- Loan-to-value ratio typically at or below 80%
Being aware of these criteria can help you get in the best position to obtain pre-approval.
How to Get the Best Mortgage Rates
While pre-approval locks in a mortgage rate, here are some tips to get the absolute lowest rates:
- Shop Multiple Lenders – Compare rate quotes from several lenders to find the best deals.
- Ask About Discounts – Negotiate with lenders for price discounts to buy down rates.
- Improve Your Credit – Work on increasing your credit score and having minimal inquiries.
- Lower Your Debt – Pay down debts so you have a lower debt-to-income ratio.
- Make a Larger Downpayment – Putting 20% down or more if you can afford it secures the best rates.
- Check for First-Time Homebuyer Programs – These programs offer discounts and more competitive rates.
- Consider an ARM – Adjustable-rate mortgages sometimes have lower introductory rates.
The time you take to shop around and improve your financial profile can really pay off via much lower rates and monthly payments.
5 Common Mortgage Pre-Approval FAQs
Q: How long is a mortgage pre-approval valid for?
A: Most mortgage pre-approvals are valid for 60-90 days. Rates are locked as long as you close within that period. Get pre-approved when you are serious about buying in the near future.
Q: Can I get pre-approved with a cosigner/guarantor?
A: Yes, some lenders may allow a relative or someone to co-sign your mortgage to improve debt ratios and chances of approval if your finances alone don’t qualify.
Q: Will pre-approval affect my credit score?
A: Pre-approval requires a credit check, which causes a small temporary ding to your scores. But higher scores greatly outweigh this short-term impact.
Q: What happens if I’m denied mortgage pre-approval?
A: Work on improving your credit, pay down debt, or increase your downpayment savings. Wait a few months and then re-apply with the same or another lender once your financial profile improves.
Q: Can I get pre-approved for a mortgage after bankruptcy/foreclosure?
A: Yes, but you may need to wait 12-24 months after the discharge/foreclosure date for the best approval odds and rates. Use the time to rebuild your credit.
Summary of Key Points
- Get mortgage pre-approval before starting your home search to confirm exactly what you can afford and lock in competitive rates.
- Pre-approval is much more comprehensive than just pre-qualification and makes your offer stronger.
- Shop multiple lenders and work to improve your credit score and lower debts to get the very lowest mortgage rates.
- You’ll need good credit, stable income, and cash reserves for any downpayment to meet pre-approval requirements.
- Being patient and taking steps to boost your financial profile will pay off greatly when seeking mortgage pre-approval.
Mortgage pre-approval places homebuyers in an advantageous position. You’ll have confidence knowing your price range and that your financing is secured when you find the perfect home.