You don’t have to wait until you find your dream home to start the buying process. For serious homebuyers, getting pre-approved for a mortgage can increase your chances of getting a seller to accept your offer.
When you get pre-approved for a mortgage, you’ll get a letter from a lender that lets you know how much you’re qualified to borrow. Additionally, it lets sellers know that you’re serious about buying a home.
If you’re considering getting pre-approved for a mortgage, here’s what you need to know:
- What is pre-approval?
- How to get pre-approved
- Prequalification vs. pre-approval
- Pros of getting pre-approved
- Cons of the pre-approval process
What is mortgage pre-approval?
A mortgage pre-approval is a letter from a lender that specifies how much you’re qualified to borrow for a home purchase. While getting pre-approved isn’t necessarily a requirement when buying a home, it can give you a competitive edge should you decide to submit an offer. This is because it shows sellers that you’re a serious buyer.
To determine if you qualify for pre-approval, lenders will typically consider the following information:
- Credit report: Your credit score and history will give lenders an idea of how likely you are to repay your mortgage. To access your credit report, lenders will ask you to provide your driver’s license (or another government issued photo-ID) and your Social Security number. You’ll need at least a 620 credit score to qualify for most home loans.
Keep in mind that when you get pre-approved, lenders will perform a hard credit inquiry. This can cause your credit score to drop by a few points for up to two years. - Proof of income: Lenders want to make sure you have sufficient income to cover your monthly mortgage payments. You’ll likely have to provide recent pay stubs, bank statements, and W-2s from the last two years.
- Assets and savings: This includes cash in your checking or savings account, real estate investments, and retirement savings accounts.
If you qualify, the lender will send you a pre-approval letter, which gives you an estimate of your loan amount, interest rate, and what your monthly mortgage payments would be based on information in your credit report. Your pre-approval letter is typically good for 30 to 90 days, so the best time to get pre-approved is when you’re serious about shopping for a home.
Keep in mind that pre-approval doesn’t mean you’ve been approved for a loan, nor does it guarantee that you will be approved. It’s also not a commitment for you to borrow from a specific lender for your mortgage. Rather, it gives you a realistic idea of what you can afford to borrow.
How to get pre-approved for a mortgage
You can streamline the process with a little preparation. To get pre-approved for a mortgage, follow these steps:
1. Check your credit score
Before applying for any type of loan, it’s important to know where your credit stands. You can get a copy of your credit report for free at AnnualCreditReport.com. Scan your report for any errors, such as incorrect late payments or closed accounts reported as open, and dispute them with the appropriate credit bureau to potentially boost your score.
Most mortgages have a minimum 620 credit score requirement, but this can vary depending on the lender and loan type. For example, you may be able to qualify for Federal Housing Administration (FHA) loans with a 580 credit score.
2. Save for a down payment
This is a percentage of the home’s purchase price that you’ll pay the seller up-front at closing. The larger your down payment, the lower your interest rate and monthly payments will be.
Keep in mind that if you put down less than 20%, you’ll have to pay private mortgage insurance (PMI) each month on top of your mortgage payments. PMI is typically automatically canceled once you have 20% equity in your home.
However, the amount you need to provide for your down payment can vary depending on the type of loan you borrow. Most mortgages require a down payment of at least 3% to 20%, but you’ll only need to put 3.5% to 10% down for an FHA loan.
3. Gather necessary documents
Having all of your information ready will come in handy when it’s time to apply for pre-approval. Lenders will typically ask for the following:
- Pay stubs or W-2s
- Tax returns from the last two years
- Bank and investment account statements
- Government-issued ID
- Outstanding debt statements, such as auto or student loans
4. Pay down existing debt
In addition to your credit history, lenders will consider your debt-to-income (DTI) ratio to make sure you can afford to repay your mortgage. Your DTI ratio is the total of your monthly debt payments divided by your gross monthly income, expressed as a percentage.
Having a high DTI ratio may signal to lenders that you won’t be able to make your monthly payments. Most home loans require a DTI of 43% or less, but it’s a good idea to get this number as low as possible to make yourself a more attractive loan candidate.
5. Shop around and compare lenders
When you’re ready to get pre-approved, it’s a good idea to compare multiple lenders. This will ensure you lock in the lowest possible mortgage rate.
6. Apply for a loan
When a seller accepts your offer, you’ll then apply for a mortgage with the lender of your choice. Being pre-approved can make you a more attractive buyer and give you a realistic picture of how much you can afford to spend, depending on your credit and finances.
The time to close on a mortgage typically takes up to 30 days after applying. But getting pre-approved can streamline this process, as you’ll already have submitted most of the required paperwork.
Prequalification vs pre-approval
In your search for lenders, you may encounter offers for mortgage “prequalification” and “pre-approval.” Some lenders use these words interchangeably, but they can refer to different processes.
A prequalification letter and a pre-approval letter are very similar, and both imply that a lender is willing to lend you money up to a certain amount. However, neither is a guarantee of loan approval.
For lenders that distinguish between the two, prequalification is a less stringent process to estimate how much you might be able to borrow based on the information you provide and, sometimes, a credit check.
Pre-approval, on the other hand, is a more in-depth dive into your credit and financial history. It’s as close as you can get to the loan application process without actually applying for a mortgage.
Pros of mortgage pre-approval
- Know your budget: Knowing how much you’re qualified to spend can help you avoid looking at homes outside of your budget.
- Makes you a more attractive buyer: Sellers may be more likely to welcome offers from pre-approved buyers. This is because it shows you’re serious about buying a home, as you’ve already put some effort into the purchasing process.
- Faster closing: Getting a mortgage and closing on a home may happen quicker since you’ve already been through part of the underwriting process.
- Lets you shop around: Being pre-approved doesn’t mean you have to borrow from the lender that pre-approved you. You can still compare mortgage lenders to find the right loan for your needs.
Cons of mortgage pre-approval
- Can affect your credit score: The pre-approval process may include a hard credit check, which can cause your credit score to drop temporarily. Your score will likely drop by five points or less and stay on your credit report for up to two years.
- No guarantee of getting a loan: You may not qualify for a mortgage, even if you’ve been pre-approved. To get approved for a mortgage, you’ll go through the underwriting process. This is when the lender verifies your financial information and orders a home appraisal. If you pass underwriting, your mortgage will be approved.
- Your pre-approval expires: Most pre-approval letters expire after 30 to 90 days, depending on the lender. If your letter expires, you may have to go through the process again.Â