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Pre-approval means lenders have provided preliminary approval for a loan based on your specific circumstances. If you submit your pre-approval letter when you make an offer on a home, you'll be showing sellers that you can get financing. And your pre-approval enables you to know the terms of your loan before you commit to borrowing.
There are many things you need to do before you apply for a mortgage, and pre-approval is an important stage. The pre-approval process takes time and requires you to provide a lot of financial documentation. This step-by-step guide will help you understand exactly what's involved and make it easier for you to get your mortgage pre-approval.
What is mortgage pre-approval?
Mortgage pre-approval is the process of getting a lender to approve you for a loan and set out specific details of the loan you qualify for. After you provide detailed financial information, your lender will offer a pre-approval to borrow up to a specific amount at a designated interest rate.
Final approval for your loan will be subject to verification that your financial circumstances haven't changed. The lender will also need an appraisal and other information about the property you're buying to ensure it can serve as sufficient collateral for the loan. But as long as your situation remains the same and the property is appropriate to guarantee the loan, you should be able to borrow at the terms offered by the lender in your pre-approval.
Pre-approvals are generally good only for a limited period of time, which is usually between 30 and 90 days, depending on the lender. You can get pre-approved by multiple lenders so it's ideal to shop around for the best personalized loan offer, but some lenders are much faster with issuing pre-approvals than others. You can expect to wait anywhere from several days to several months to get pre-approved.
Here's how to get pre-approved for a mortgage step by step
There are a few key steps you'll need to take to get pre-approved for a mortgage. These include:
- Check your credit report and score: Your credit is a key factor in determining if you'll be pre-approved and what rate you'll be offered. Use your credit score to see which mortgage you are likely to qualify for. If your credit is poor, look into government-backed loans that are better suited to people with lower credit scores, such as an FHA loan. You'll also want to look closely at your credit report to make sure there are no errors to correct. If there are mistakes, get them fixed before applying.
- Decide how much you want to borrow: Your lender will pre-approve you for a loan amount based on your credit score, income, and debt levels. But you shouldn't necessarily accept the largest loan you're offered, as spending too much on a house can interfere with other financial goals. Decide on the maximum you want to borrow based on your goals for home ownership and the monthly payment amount that fits comfortably into your budget.
- Gather your financial documents: You will need lots of financial paperwork to get pre-approved, including proof of income and assets. Tax returns, W-2s or 1099s, and pay stubs from your employer can all provide proof of income while bank statements and investment account statements show potential lenders the value of your assets. Lenders like to see that you have worked for the same employer for at least two years and that you have liquid cash, or money accessible to be used as your down payment or to cover mortgage costs.
- Choose the mortgage lenders you want to pre-approve you: Banks, online lenders, and credit unions all offer mortgage loans. Tips for choosing the right lender include understanding the different types of mortgages and researching lenders and mortgage rates. It is a good idea to get pre-approved by several lenders so you can compare the terms of your loan. Some lenders also make pre-approval much simpler and faster than others. Shop around the best mortgage lenders to find the right deal for you. If you have an existing relationship with a bank, that lender may also be more willing to work with you and approve your loan.
- Submit your application for pre-approval: You can often do the process entirely online, including submitting scanned or electronic copies of your financial documents. Your lender will ask for permission to do a credit check and will have forms for you to sign. The credit check not only helps lenders determine if you've been a responsible borrower but also shows what other outstanding debts you have. If your debt-to-income ratio is too high, you may not be able to get approved for a loan.
- Wait for pre-approval: Lenders will determine the amount you can borrow and the rate at which you can borrow. If you're approved, you'll receive a letter outlining the details including your maximum loan amount, the mortgage loan term, and your mortgage rate. You can then decide if you want to accept the loan.
Be aware that pre-approval is not a 100% guarantee you'll be able to borrow. Make sure you act within the specified time. If you do, you should get the loan at the agreed-upon terms -- assuming your financial situation stays the same and the house appraises for enough to serve as sufficient collateral.
Still have questions?
Read more about mortgage pre-approval:
Ready for mortgage pre-approval?
Getting pre-approved for a mortgage loan is an important step in the home buying process. Our experts recommend mortgage pre-approval before you begin looking at houses or deciding on a real estate agent.
FAQs
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The amount of time it takes to get pre-approved varies by lender as well as by the complexity of your financial situation. Some lenders will review your financial situation and provide a decision within a few days. Others could take weeks or even months to verify all of your financial details and provide pre-approval, particularly if you are self-employed with multiple income sources to check or if you've had credit problems in the past.
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Mortgage pre-qualification is an informal process based on information you submit. A lender will look at your credit score and estimated income to determine how much you'd likely be able to borrow and what your probable rates would be. Pre-approval is a more formal process in which you actually submit an application and a lender reviews your specific financial details to give you a personalized loan offer.
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While you can make an offer on a house without mortgage pre-approval, some sellers will not accept the offer -- particularly if there's a contingency in the contract specifying that you don't have to go through with the transaction unless you're approved for financing. Sellers want to see a pre-approval letter as evidence that you're actually qualified to buy a home and, especially in a seller's market, they are likely to choose a buyer who has already got their mortgage approved.
Our Mortgages Expert
Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
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