The Importance of Mortgage Preapproval

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:

Pre-Qualification

  • 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

Pre-Approval

  • 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:

Credit Score

  • Minimum credit scores vary by lender, often around 620+
  • Scores of 720+ get the very best rates
  • Long history of responsible credit use

Income Verification

  • Tax returns, recent pay stubs, documentation of your income
  • Stable employment history with 2+ years in same field

Downpayment Funds

  • 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.

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