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Buying a home is exciting -- but complicated. What neighborhood do you want to live in? Do you want a fixer-upper or move-in-ready home? And, possibly the most crucial question: How much can you really afford to spend?
Enter the mortgage pre-approval letter. When you get pre-approved for a mortgage, you'll find out how much you're eligible to borrow. Then, you can focus your search on properties within your financial reach.
What is a mortgage pre-approval letter?
A mortgage pre-approval letter is a document from a lender indicating that you have the financial means to qualify for a certain mortgage amount. Getting pre-approved for a mortgage shows that you're serious about buying a home and that you can afford it. Both are important to sellers, and if you're looking to buy in a competitive market, pre-approval could spell the difference between having an offer accepted or not.
How mortgage pre-approval works
Getting pre-approved for a mortgage isn't the same thing as getting pre-qualified. Pre-approval is a more complex process than pre-qualification, and proves your eligibility more authoritatively.
When you're only pre-qualified, a lender has identified you as potentially being eligible for a mortgage -- but you haven't gone through an official approval process.
On the other hand, to get pre-approved for a mortgage, you have to submit financial information to a mortgage lender for additional vetting. Here's a list of financial information you might need for pre-approval:
- Proof of income (including pay stubs and W-2s)
- Proof of assets (such as bank or brokerage account statements)
- Most recent tax return
- Outstanding debt
- Employment status (where you work and how long you’ve been there)
Once you've provided that information, a lender will usually access your credit report and review it for red flags. They'll also look up your credit score.
Assuming everything checks out, the lender can provide you with a pre-approval letter. This letter states the amount you're eligible to borrow based on your financial circumstances.
Why get a mortgage pre-approval letter?
A pre-approval letter can be handy if you find yourself in a bidding war. Sometimes, multiple buyers will try to outbid each other for the same property. If you're the only one who's been pre-approved for a mortgage, the seller may accept your offer. The pre-approval letter shows you're capable of standing behind your offer financially.
Also, pre-approval can help you search for a home. If you're approved to borrow $300,000, and you have $50,000 for a down payment, you'll know your budget for buying a home is $300,000 (loan) + $50,000 (down payment) = $350,000.
Your house budget shouldn't just depend on the amount your pre-approved for. Make sure you can afford monthly mortgage payments for the amount you plan to borrow. Check out our mortgage payment calculator to estimate the monthly costs of different mortgage amounts.
Considerations to remember
It pays to get a pre-approval letter if you're house-shopping. However, a pre-approval letter doesn't guarantee a mortgage. You'll need to fulfill other criteria to formally qualify for a mortgage.
Furthermore, keep in mind that mortgage pre-approvals generally expire 60 to 90 days from when they're issued.
Finally, shop around for mortgage pre-approvals from different mortgage lenders -- but do so within a relatively short time frame. When a lender does a hard credit check as part of the pre-approval process, your credit score might go down. But multiple hard credit checks within a few days are all counted as one (which is better for your credit score).
Mortgage rates can fluctuate from month to month, so it always pays to be on the lookout for the lowest one possible. You can always choose to get a pre-approval letter from a different lender if you find a better deal.
Still have questions?
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Maurie Backman is a personal finance writer who covers topics ranging from Social Security to credit cards to mortgages to REITs. She also has an editing background and appears on live podcasts to talk about financial matters.
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