How to Get Pre-Approved for a Mortgage

During the mortgage pre-approval process, lenders evaluate a prospective homebuyer's credit score and income to determine whether or not they qualify for a mortgage. If an applicant is approved, lenders will decide the mortgage amount and interest rate for which a borrower is qualified. At the end of this process, approved homebuyers will receive a pre-approval letter, or PAL, which shows home sellers that financing is already secured. This can help expedite the closing process when buying a home.

Mortgage Pre-Approval Explained

Mortgage pre-approval allows qualified homebuyers to receive confirmation that they will be able to borrow money to finance their home purchase. As such, lenders check an applicant's income, assets, credit report and employment history to determine their eligibility. This process usually takes two to four weeks, though some online lenders advertise preapprovals that take under an hour. In general, each approval is valid for 90 days, but can often be renewed after that period ends.

Most importantly, pre-approval proves to the seller and to real estate agents that a potential buyer is serious about making an offer. In general, sellers and agents will prefer an approved buyer to one who hasn't gone through the preapproval process. Getting approved before looking at houses can also help you narrow the scope of your home search, allowing you to only focus on homes within your approved mortgage budget.

It's important to note that lenders only make conditional commitments during the preapproval process. This means that if something changes with your employment status or income, lenders aren't bound to honor the approval agreement. However, if nothing changes from the time that an approval application is submitted, most homebuyers can expect that their financing will still be available at the time of purchase.

Documentation Needed for Pre-Approval

Before approval is granted, lenders look at a number of documents to get a clear picture of an applicant's financial situation. In addition to identification information like a passport and social security number, lenders will need documents that can prove a potential homebuyer's income, assets and employment. Sufficient documentation should include thirty days of pay stubs, two years of tax returns and W-2s, and quarterly statements for all open banking and investment accounts.

Documents Needed
Income
  • Pay stubs from last 30 days
  • W-2s and tax returns from past 2 years
Assets
  • Quarterly statements from all open bank accounts
  • Documentation of any unearned income
Employment
  • Pay stubs are usually sufficient
  • For self-employed, necessary documents will vary by lender

To verify your assets, lenders also need to see that all of an applicant's income is documented and can be traced back to a legitimate source. For example, any claimed income from renting a property must be proved by providing the property's lease to the loan officer. This thorough investigation determines the amount that an applicant can comfortably make on a down payment, and it also ensures that the lender can approve each applicant for the mortgage for which they are truly qualified. Lenders will also look at credit score to determine an applicant's creditworthiness and the interest rate they might receive on their mortgage.

Remember that the preapproval process will be the smoothest and most efficient if all of the necessary documents are ready before you approach a lender. Additionally, if lenders request any extra documents, it's best to get them the information as fast as possible. Although the preapproval process can seem drawn out—especially if done through a traditional lender rather than online—it is an important step towards buying a home. Once it's complete, it will be much easier to close a deal with a seller.

Pre-Qualification vs. Pre-Approval

Mortgage pre-qualification is an informal process through which a lender interviews a potential homebuyer to determine the loan amount for which they might qualify. This process requires much less documentation and can usually be conducted verbally. In contrast to pre-approval, applicants in the pre-qualification stage only give a lender a rough outline of their income, assets and credit, rather than a detailed picture of their financial situation.

Pre-QualificationPre-Approval
  • Based on self-reported information
  • Unofficial estimate of a mortgage amount
  • Based on official documents
  • Mortgage estimate is usually upheld by lender

Pre-qualification is typically one of the first steps in the homebuying process, and it is used by potential buyers to get an idea of their budget. Pre-approval is a much more intensive process, and the results of it are more official. For those who are seriously looking to buy a home, pre-approval is a necessary step. However, for those who are unsure whether they can or will actually buy a home, or who want to know how much they can afford, pre-qualification can help inform those decisions.

Additionally, going through the pre-qualification process will not affect your credit score—as it will be self-reported rather than officially obtained from a credit bureau. In contrast, the pre-approval process will cause a credit score drop, as happens when an official report is pulled from a credit reporting agency. However, the bureaus will count all reports requested within a 45 day window as only one pull, which allows homebuyers to shop between multiple lenders.

What to Do if Pre-Approval is Denied

If mortgage pre-approval is denied, it could be due to either a lender's particular standards, or to an applicant's personal financial situation. For those unsure of which factor caused the denial, it might be helpful to get a second opinion from another lender or from another loan officer within the same company. Sometimes lenders can evaluate applications with different metrics, and a second opinion might allow a denied applicant to be approved.

However, if multiple lenders reject a pre-approval application, it could be a result of a low credit score or a high amount of debt. If you're looking to raise your credit score, it's important to pay off all credit card and loan bills on time, and to minimize any missed payments. If you have a high debt-to-income ratio, one solution would be to pay off your outstanding debt before applying for mortgage pre-approval. Although this process could take months or a few years, it could also give you time to save for a bigger down payment while paying off some of your debt.

Comments and Questions