What is a Mortgage Pre-Approval?

If you talk to anyone in the real estate industry about buying a home, one the first things you’ll hear is “have you gotten a mortgage pre-approval”. If you are a serious home buyer, it’s imperative that you get this because it shows sellers that it’s possible for you to obtain the financing necessary to purchase a home. 

Below is a guide of the pre-approval process that will be helpful when taking this very important first step to homeownership.

What is a mortgage pre-approval?

It’s important to note that a mortgage pre-approval does not mean you’ll definitely get a loan for the home you want to buy. What it does mean is that a loan officer has looked at your income, debt, assets, and credit history. This determines how much you can borrow, how much can be paid each month. It also determines what the interest rate will be.

Once you are pre-approved, the lender will send you a pre-approval letter that you can show to sellers. The letter shows your seriousness as a buyer. This is because you have a lender that you are working with and are capable of buying a home.

Additionally, the pre-approval letter will state the amount of loan you are able to borrow. This is so you’ll know how much you can afford when house shopping. In turn, this will help narrow down the search process to something attainable.

Mortgage pre-approval vs. a mortgage pre-qualification

The two are not the same. The main difference is the amount of research the lender put into the situation.

To be pre-qualified, a buyer has to simply give a basic overview of debt, income, assets, etc. Without looking any further, a lender can tell you how much mortgage they think you will qualify for. It’s really meant to be viewed as a rough estimate.

A pre-approval requires much more research on the lenders part. They have to verify the debt, income, assets, credit history etc. are in fact accurate.

What do you need to get a mortgage pre-approval?

The mortgage pre-approval process is very involved and requires a lot of documentation. This is to prove to the lender that you are able to afford a mortgage payment. It also is to show that you will pay it back sufficiently. Below are some items you can expect your mortgage lender to request when starting the application process.

Identification

• Drivers license: This is needed to verify it’s actually you that is applying for the loan. It shows that there isn’t some sort of identity theft occurring.
• Credit history: Lenders will want to verify your ability to pay debt and debt to income ratio. This includes credit card debt, student loans, and car payments. 
• Green card: You’ll only need this if you aren’t a U.S. Citizen.
• Employment verification: Be prepared for the lender to call your employer to verify employment

Income

• Last 30 days of pay stubs: This is to verify that you have been employed and received the income you stated on the mortgage application.
• Two years of W2s: A lender will want to see that you have had stable employment and stable income.
• Two years of federal tax returns: Tax returns also verify what your income was as it was reported to the government.
• Proof of any other income: If you freelance on the side or Airbnb a spare room in your existing home, you’ll want to provide documentation for other income sources.

Assets

• Bank statements: You’ll need to prove you have enough money to pay for a down payment in your bank accounts.
• Gift letter: A letter stating that down payment assistance is a gift and not an IOU.
• Statements for other asset accounts: 401k, Roth IRA, etc.

How long does it take to get pre-approved?

Usually it only takes a day or two to get pre-approved. However, having a lot of debt, previous foreclosures, child support, or a low credit score can slow down the process – up to an extra month. This all depends on how your personal finances look to the lender.

However, if you want to speed up the process, make sure have all of the above documentation ready to go for your lender. Don’t try to hide anything because it will most certainly come up later on in the process.

Can a pre-approval expire?

The answer is yes. A mortgage pre-approval can expire. The reason for this is that many things can change in a short amount of time with regards to finances. Income, interest rates and your credit can all change very quickly. With that said, a pre-approval can expire within 60 – 90 days. If it does expire, you’ll have to submit all new paperwork to get started on a new one.

When should you get a mortgage pre-approval?

Any real estate agent will tell you that getting a pre-approved mortgage is the most important step to buying a home. But it’s important to consider how long it takes for a pre-approval to expire and when you are ready to pull the trigger and make the purchase. 

In order to fall into the time period, it’s important to ensure you know what home you want, the area you would like to live in, etc.

If you are still deciding these types of things, it will be much more difficult to narrow your search and efficiently find something you want before the pre-approval expires. If you know what you want, you’ll just need to start looking at homes with your real estate agent, and then when something you like comes on the market, you can jump on the opportunity.

Conclusion

The bottom line is that it’s always better to start a conversation with a lender before starting your home buying journey. It will save you a lot of time and make the home buying process a lot easier by maintaining a competitive advantage in the market.