Preapprovals give you a leg up in a competitive real estate market
If you’re ready to begin your home shopping journey, make sure you get a mortgage pre-approval first.
A mortgage pre-approval letter is an essential step in the homebuying process. Without pre-approval, it might be difficult to determine your budget. Plus, you risk not being taken seriously by sellers — especially in a highly competitive real estate market.
What is mortgage pre-approval?
A mortgage pre-approval is a document from a lender conditionally offering you a mortgage and containing its terms, such as the loan amount, monthly payments and interest rate. This is a lender’s promise that unless your financial situation changes by the time of purchase, you’ll be approved under the outlined terms.
A mortgage pre-approval is different from a pre-qualification, even though people often use these terms interchangeably. A lender will pre-qualify you based on the information you provide and typically without running a hard credit check and give you a rough estimate of how much you’ll be able to borrow. You won’t need to submit any documents to prove the information is accurate.
When you’re getting pre-approved, a lender will verify your creditworthiness. You’ll need to complete a mortgage application and provide documents such as your recent pay stubs, bank statements and tax returns. The lender will also perform a hard credit pull, meaning your credit score can temporarily drop a few points.
Mortgage lenders have different timelines for how long it takes to issue a pre-approval. For example, Ally Bank and Better.com Mortgage can process your pre-approval online in minutes. PNC Bank advertises pre-approval in as little as half an hour. Some lenders, however, may take up to 10 days to pre-approve you.
Your pre-approval letter’s expiration date can also vary by lender, but most allow you 30 to 90 days to shop for a home and officially apply for a mortgage.
Why You Need a Mortgage Preapproval
You want to get a mortgage pre-approval at the beginning of your home buying journey for two reasons:
That’s the best way to learn your maximum loan amount
While you can estimate how much house you can afford using the calculator below or by pre-qualifying, a pre-approval will give you the most accurate number. This way, you’ll know your price range and what houses you can actually afford.
You will position yourself as a serious buyer
A pre-approval letter shows that you can secure a mortgage. This alone gives you an advantage over potential buyers without pre-approval, especially in competitive markets where real estate agents and sellers can afford to be picky about with whom they work.
How to get pre-approved for a mortgage
Since pre-approval is a much more rigorous process than pre-qualification, you want to have all your ducks in a row before applying.
First, check your credit score as it will play a big part in the lender’s decision. You can use a credit monitoring service from your credit card issuer, such as CreditWise® from Capital One. You can also check your credit by using a free service from Experian — Experian free credit monitoring. The higher credit score you have, the better the terms you’ll receive on a mortgage.
You won’t see the exact score your lender will be checking as mortgage lenders use scoring models not readily available to the public. Still, it will give you a good idea of what you’re working with.
Next, prepare the documents that will show lenders your debt, income, assets and other aspects of your personal finances. While every lender has different requirements, having the following in hand is a good starting point:
At least two most recent pay stubs
Tax returns from the past two years
Bank statements from the last 60 days
Employment verification documents
Employer contact information
List of your debts
Investment account statements, including 401(k) and IRA
Proof of rental payments or landlord contact information
Gift letters (if you’ve been gifted money for your down payment)It’s best to have all your paperwork ready before you apply — this will save you time on the back-and-forth with the lender.
Bottom Line
A mortgage pre-approval can help you gauge how much mortgage you can afford and position yourself as a serious homebuyer. It’s a good idea to apply for pre-approval at the beginning of your homebuying journey — or even better, apply with several lenders to ensure you get the lowest interest rate you can.