Why You Should Get Pre-Approved for a Mortgage Loan

Have you recently begun house hunting? This is an exciting time full of big, potentially life-changing decisions. It can also be nerve-racking and confusing. Before you get in too deep, it’s wise to get pre-approved for a mortgage loan. This preliminary step defines your house-hunting budget so you can move forward with a solid understanding of what you can afford. Learn more about mortgage pre-approval and the benefits of taking this step during the homebuying process. 

What Is Mortgage Loan Pre-Approval? 

Think of a mortgage pre-approval as a “physical exam” for your finances. Lenders will look into several key factors of your financial life to determine the likelihood that you’ll repay your mortgage. These include: 

• Credit history 
• Credit score 
• Debt-to-income ratio 
• Employment history
• Income 
• Assets and liabilities 

Don’t confuse pre-approval with prequalification. Getting prequalified tells you what loan amount you are eligible for based on your income and debts, but it carries no weight when making offers. Neither one guarantees you’ll eventually qualify for the loan, but if you’re serious about buying a house, make sure to get pre-approved, not just prequalified. 

How Long Does a Mortgage Pre-Approval Last? 

Pre-approval letters from mortgage lenders are typically valid for 60 to 90 days. There’s an expiration date because finances and credit scores change over time. Because pre-approval involves a hard credit check that can impact your credit score, you should be careful about the timing. 

Seek your first pre-approval six months to a year before starting a serious home search, especially if you suspect you might have difficulty getting a mortgage. The pre-approval process can help you uncover credit issues and give you time to address them. 

Then, get pre-approved a second time once you’re ready to start making offers. Hopefully, your financial standing has improved by now, and you can qualify for a lower interest rate and possibly even a higher loan amount. 

How to Get Pre-Approved for a Mortgage 

The pre-approval process can take as little as a few hours or up to several days. The timeline varies by lender and the complexity of your financial situation. Wonder what’s involved in getting pre-approved for a mortgage? The first step is to complete a mortgage application. Be prepared to provide identifying information, including your Social Security number, so the lender can perform a credit check. The documents needed for mortgage pre-approval include: 

• Pay stubs from the past 30 days 
• Bank statements from the past 60 to 90 days 
• Names and addresses of employers from the past two years 
• W-2s and tax returns from the past two years 
• Asset account statements, including retirement savings, stocks, bonds, and mutual funds 
• Proof of pension income, Social Security or disability benefits, divided earnings, and bonuses, if applicable 
• Information on debts, including car loans, student loans, and credit cards 
• Year-to-date profit and loss statement plus signed tax returns for the past two years (if self-employed) 
• Divorce papers (if using alimony or child support as qualifying income) 
• Gift letter and bank statements showing a transfer of cash (if funding your down payment with a financial gift) 

It is recommended that you seek pre-approval from multiple lenders to help you find the best deal. That way, when one of your offers is accepted, you’ll feel confident about which lender to choose. Keep in mind that multiple hard credit checks from numerous lenders within a 45-day window only count as one inquiry, so it doesn’t hurt your score to seek more than one pre-approval at a time. 

After reviewing your application, a lender will typically issue one of three decisions — pre-approved, denied, or pre-approved with conditions. In this third scenario, you may need to lower your debt-to-income ratio or increase on-time payments for existing debts before you can be approved. 

If you’re pre-approved, the lender will send you a loan estimate a few days after completing your application. This paperwork outlines the maximum loan amount, terms, interest rate, estimated monthly payments, and more. You will also receive a pre-approval letter on official letterhead. Plan to submit this document when making offers to increase your credibility. 

Benefits of Being Pre-Approved for a Mortgage 

Pre-approval is an extra step in the home-buying process, but it’s well worth it for numerous reasons: 

• Pre-approval tells you how much you can borrow: Online mortgage calculators are useful for making general estimates, but an official review from a lender is the most accurate way to determine what loan amount you can afford. 
• Pre-approval prevents you from overreaching your budget: It’s tempting to fall in love with a house that’s out of reach financially, but getting pre-approved first allows you to only shop for what you know you can afford to buy. 
• Pre-approval shows you’re a serious buyer: In hot housing markets, sellers have the advantage. Due to intense demand and limited homes for sale, they may be less likely to consider offers without accompanying pre-approval letters. Improve your odds of standing out as a viable buyer by getting pre-approved. 
• Pre-approval gives you negotiating power: Your pre-approval letter shows the seller that your finances are in order. You have more flexibility to negotiate terms and pricing than if you make an offer without being pre-approved first. 
• Pre-approval speeds up the closing process: The lender that pre-approved you already has much of your financial information. If you choose this lender, securing your final loan qualification and closing on the house should go smoothly, saving you time and stress at the conclusion of a long home-buying process.