What is a Pre-approval For a Mortgage?

2K Shares

When buying your first house, understanding pre-approval for a mortgage becomes essential.

Many first-time buyers will seek knowledge on how to get pre-approved for a mortgage. Some will hear mortgage pre-qualification vs. pre-approval and wonder if there is a difference.

There has been some confusion among those looking to buy a home and qualify for a mortgage loan regarding the difference between a pre-approval and a pre-qualification letter.

Indeed, they sound similar, so hearing these terms before or during a hectic time while considering buying a home can only add to novice buyers’ confusion.

Before starting your house hunting, you must know the difference between these two mortgage terms to plan appropriately. The home-buying process should start by getting pre-approved for a mortgage.

From coast to coast, whether you are buying a home in Westborough, Massachusetts, or Englewood, California, home sellers want to know you can buy their property.

The best way to assure yourself that the buyer is well qualified to purchase is to demand a mortgage pre-approval letter. From many years of experience as a Realtor, you would never want to skip this vital step. Offers without proper paperwork is foolish.

Buyers need to Have proof that they qualify and have no financial issues. It is one of the vital steps to homeownership.

The difference between mortgage preapproval vs. prequalification is enormous! Let’s look at how to get pre-approval with a mortgage lender for a home purchase.

What is a Pre-approval For a Mortgage?

According to the Federal Reserve, a mortgage preapproval is a written commitment issued by a lender following a comprehensive creditworthiness analysis. A pre-approval for a mortgage determines how much you’ll be able to borrow.

A mortgage preapproval includes such factors as verification of income, verification of employment, available financial resources, and the evaluation of other areas typical of a credit evaluation process.

Mortgage preapproval status for a loan is usually conditional upon the following:

1. A suitable property. The identification by the buyers of an eligible property they wish to purchase.

2. Continued creditworthiness. Continued creditworthiness means there is no material change in the applicant’s creditworthiness or overall financial condition before closing the sale.

3. Additional terms. Other limitations may or may not be related to the solvency and financial health of the applicant. These added items are ordinarily attached to the traditional mortgage application by the lender.

They can include a suitable title insurance binder, a completed a home inspection with some types of mortgages (VA and FHA loans), a certification of no termites, or something similar with certain kinds of mortgage products.

Issuance of a mortgage preapproval letter from the lender implies that a credit decision has been made that will more than likely favor the completion of a mortgage commitment letter at some point shortly.

In effect, the mortgage loan will be submitted to underwriting.

Please understand that a mortgage preapproval letter does not guarantee you will get the loan. It is, however, as close as you can get. The mortgage lender has vetted your finances, so there is an excellent chance you’ll be approved.

What is A Pre-Qualification Letter?

To prequalify for a home loan doesn’t mean much. The concept behind mortgage prequalification is this: you are a buyer, and you’re looking for a home. You might not have sufficient funds to purchase a house; however, this defines most home buyers.

As a result of these circumstances, your ability to buy a house depends on your ability to borrow money.

Because of this, you’ll talk with potential lenders before shopping for homes to determine your mortgage buying power and be able to consider different loan programs to decide which might be ideal for you.

A mortgage prequalification is an estimate of your borrowing power. In effect, it is a statement from the lender putting forth that based upon your current financial circumstances, i.e., income, debt, and credit score, you will likely be qualified for a mortgage for a certain amount.

Receiving “ mortgage prequalification” can be accomplished relatively simply with a phone call to the lender.

The lender may or may not run your credit report to confirm your finances’ details and get a clearer picture of the amount and terms you’ll qualify for.

It is unlikely the lender will verify your employment or income. They are essentially taking your word for it.

As a real estate agent for the past thirty-seven years, I can honestly tell you a prequalification without verification of financials is worthless.

A pre-qualification is worthless when something as significant as advising a buyer’s ability to purchase is on the line.

Let’s now look at how to get mortgage pre-approval so you don’t waste your time.

Essential Facts to Know About Approval

1. Preapproval for a mortgage is the initial step in the home loan process. Understanding how to get a home loan is crucial.
2. It involves assessing and verifying an individual’s financial information to determine their borrowing capacity.
3. The process typically involves submitting documents such as income statements, tax returns, and credit reports.
4. It helps borrowers understand how much they can borrow and what interest rates they may qualify for.
5. Preapproval gives potential home buyers an advantage in competitive real estate markets.
6. Lenders evaluate factors such as credit score, debt-to-income ratio (DTI), and employment history during the approval process.
7. Obtaining preapproval does not guarantee final mortgage approval but increases the likelihood of getting approved.
8. The preapproval process usually takes a few days to complete.
9. Some lenders may charge a fee for preapproval, while others offer it at no cost.
10. Preapproval letters are valid for a specific period, usually around 60-90 days, during which borrowers can shop for homes within their budget.

How to Get Pre-approved For A Mortgage

To get pre-approved for a mortgage, you will want to start the pre-approval process by speaking with a financial institution specializing in home loans.

You will meet with a loan office or mortgage broker to review your financial situation and a loan program that will suit your needs. Choosing a lender is essential because it will influence the loan terms you receive.

The loan type that works best for you should be discussed at length. We will discuss the types of loans you might want in detail momentarily.

There will be a discussion on the amount of money you want to borrow and the maximum amount you qualify to receive. An excellent mortgage broker will discuss the monthly payment to ensure your comfort level.

It will be a good idea not to overextend yourself, especially if it is your first home purchase. Your mortgage payments should fit comfortably into your budget based on income and other current debts like student loans or car payments.

The mortgage broker or lender will take a loan application filled with your personal information.

What Documentation Mortgage Lenders Want to Provide Approval

For the mortgage lender to provide a preapproval letter, they must do some due diligence on your financial health. As part of the mortgage pre-approval process, you can expect your loan officer to research the following information:

A detailed look at your credit history
Your current credit scores
Your current debt-to-income ratio
Employment history
Your present income
Assets, including your savings accounts and investment accounts
Your debts, including credit cards, car loans, child support, and other personal loans.
Recent pay stubs
Your tax returns

The Process of Granting Mortgage Preapproval

When filling out your mortgage application, you will provide all your personal information, including your social security number, so the lender can pull your credit report.

One thing to remember is that credit checks are considered a hard inquiry on your credit reports. A hard credit check has a slight downward impact on your credit scores. A soft credit check does not.

However, don’t worry about applying to multiple lenders due to hard inquiries. When shopping for lenders, as long as it is within 45 days, FICO scoring will treat multiple credit checks as one. Your FICO score should not drop from having various lenders check your score.

What Does a Lender Need?

There are eight sections in a mortgage application you will fill out to be pre-approved for a mortgage. They are the following:

Loan Type and Terms

The loan type and terms of the mortgage: The type of mortgage you are looking for, how much money you are looking to borrow, the length of the loan, and the mortgage rates.

Loan Purpose and Housing Info

Purpose of the loan and property information: The legal address and description of the home. The year the property was built. If the loan is for refinancing, purchase, or new construction financing. The lender will also want to know whether the mortgage is for your primary residence or an investment.

A Borrower’s Financial Info

The borrower’s personal information: This includes your full legal name, social security number, date of birth, marital status, how many dependents, and your address history.

Employment Status and Info

Your employment information: The contact info for present and past employers if you have only been there for under two years. Your employment timeframe, title, and gross monthly income will also be required.

Income and Expenses

Monthly income and housing expense info: The mortgage lender will want a detailed accounting of your gross monthly income, commissions, bonuses, and other income, such as alimony or child support. You will also need to provide your housing expenses, including any current mortgage payments, home insurance, property taxes, HOA dues, or any (private mortgage insurance), i.e., PMI.

Assets and Liabilities

Your assets and current liabilities: You must provide an accounting of all your savings and checking accounts with their current balances. Any other financial statements with their values, such as stocks, bonds, mutual funds, and life insurance.

The lender will also want your bank account and investment account statements to validate you have available funds for a down payment, closing costs, and cash reserves. They will also want to know about outstanding debts such as car loans, student loans, credit cards, child support, alimony, and other obligations.

Home Purchase Details

The details of your purchase: The lender will want to know the purchase price of your new home and the required loan amount.

Other Information

Other declarations: The last part of the mortgage application will ask whether you have been involved with prior judgments, bankruptcies, foreclosures, liens, or pending lawsuits. Essential checking up on all the potential negative information.

How Long Does The Process Take?

Are you wondering how long the preapproval process will take to be completed?

You can expect the lender to charge an application fee once you have committed to them. Some online lenders can quickly grant you preapproval, while others can take several days. The preapproval time frame will depend somewhat on how complex your financial situation is.

In most circumstances, the lender I have been working with for the last few decades will issue a pre-approval for a mortgage within 24 hours.

How Long Does a Pre-Approval Last?

There will be an expiration date on your preapproval letter as well. You must update it if you don’t find a home in the allotted time frame. The amount of time granted in a preapproval letter is typically 90 days.

Remember how long the pre-approval lasts if you have been searching for a home for a while with no success. You don’t want to find your dream home only to realize your pre-approval letter has expired.

Taking the necessary steps on getting pre-approved for a mortgage is well worth it when buying a house!Click To Tweet

The Lender Will Provide a Letter For Homebuyers

Pre-approval for a mortgage loan will include getting a letter from the lender. The letter will be used to prove you’re a qualified borrower when making an offer on a home.

You can expect any good listing agent to have a requirement of receiving a mortgage pre-approval letter with an offer to purchase. Part of a listing agent’s responsibilities is ensuring the buyer can get a mortgage.

The pre-approval letter will state the mortgage amount and purchase price the buyer is qualified to pay. Mortgage pre-approval letters will usually display the type of mortgage program. Companies will also provide the down payment amount, interest rates, and their contact infomation.

The Loan Estimate is Next

Once the lender has received your completed mortgage application, they have three business days by law to provide you with a loan estimate. Loan estimates include information on whether they have granted your mortgage preapproval request.

The loan estimate also provides basic financial information, such as the specific mortgage amount, the type of mortgage, your interest rate, estimated closing costs, estimated payments, and an estimate of home insurance and property taxes.

There will also be a maximum loan amount you’re approved for. The specific loan amount will be based on all your financials provided.

When pre-approved for the mortgage, the loan will be sent to a mortgage underwriter who verifies your documents vs. your mortgage loan application.

The lender will need quite a few things before completing the loan process. These are the things you will need for mortgage approval:

Driver’s license or valid passport
Income tax returns
W-2 tax returns for the previous two years
A Schedule K-1 if you are self-employed
30 days of pay stubs
60 days of bank statements
Information on bank accounts, investment accounts, etc.
Divorce papers, if applicable
Any gift letter for down payments

Here is a detailed rundown of all the documents a lender will request when applying for a mortgage. Check this information for all the various loan choices and what they require.

Remember that before committing to a lender, you will also want to research. Picking a lender is not something that should be taken lightly. If you are working with a real estate agent, they may offer to contact one of their preferred lenders.

Speaking to a few financial institutions ensures you get the most competitive terms. Ensure you don’t just look at the interest rate but the whole packing, including the mortgage points and closing costs they will charge.

You will want to compare apples to apples, which is what the lenders offer you. There are many questions to ask lenders to ensure you’re well-educated on the process.

The Mortgage Types to Choose From

When getting approved for a mortgage, one of your critical decisions will be choosing a loan type. Potential buyers have many choices, including conventional loans, FHA loans, VA loans, USDA loans, and many other specialized mortgage products.

If you are a first-time homebuyer, here are some mortgage loan programs worth exploring. In the long run, part of the loan process will be worth researching which financing program is best. Check out this resource for a detailed explanation of the pros and cons of various mortgage programs worth exploring.

Pre-qualification vs. Pre-approval: What’s the Difference?

As mentioned, there is a difference between a pre-approval for a mortgage loan and a pre-qualification.

In a nutshell, the difference between being pre-approved vs. prequalified is as follows:

” Mortgage pre-qualification” determines whether the prospective applicant will most likely qualify for a loan within the lender’s current programs and standards. It is also a decision about the possible amount of the loan for which the prospective applicant will qualify.

“ Mortgage pre-approval” is a much more formal process. With pre-approval, you’ll have completed an application with the lender and supplied them with income data, your W2s, bank statements, etc.

The bank has gathered information about your employment and will also run your credit report; the lender must run the application through an automated underwriting process.

A mortgage preapproval is a far more complete and comprehensive process than what is utilized for mortgage prequalification status.

Some Lenders Use Mortgage Approval Language Interchangeably

One thing that can confuse many folks is that many different lenders use the words “preapproval” and “prequalification” as if they mean the same thing. Using the phrases prequalification and preapproval interchangeably can cause doubt for real estate agents and consumers alike.

Here is what’s vital to know: Accepting a mortgage pre-qualification from a lender may be perfectly acceptable as long as they do the same things to verify a borrower as mortgage preapproval would.

In other words, you should be all set if a mortgage prequalification includes verifying the borrower’s income, employment, and credit score.

A pre-qualification is not worth the paper it is written on unless a borrower’s financial information is verified. Mortgage prequalification should always be confirmed by real estate agents representing home sellers.

Likewise, an exceptional buyer’s agent should check their client’s prequalification letter before proceeding.

The Pre-Approval For a Mortgage Advantage

A mortgage preapproval means that you are far closer to receiving a mortgage loan commitment from a lender than with just a pre-qualification.

A pre-approval can help buyers take some guesswork out of the home-buying process.

In the eyes of any seller, you are considered a “stronger customer” with mortgage preapproval status than just a pre-qualification letter.

A mortgage pre-approval is a bargaining tool in negotiating a better deal with a seller. Overall, having a pre-approval can make you feel more comfortable with the home-buying process and have more of a leg to stand on when negotiating with sellers.

It would help if you understood that neither a pre-qualification letter nor mortgage preapproval is considered absolute, iron-clad loan commitments from lenders.

A creditor will still have to look closer to assess home appraisals, verify the information collected, and in some cases, re-check the applicant’s credit report again before agreeing to issue a loan.

However, having a mortgage preapproval in hand is about as close as possible to proving you’ll get the financing.

When a buyer is mortgage pre-approved, they will typically not get financing unless one of the following takes place:

The buyer loses their job before closing.
A buyer has misrepresented something in their mortgage application.
The buyer has not disclosed something like an impending divorce to the lender.
The home does not appraise for the value needed to get financing.

As you can now see, pre-approved vs. prequalified is monumentally different.

What Are The Benefits?

You might be wondering, if neither mortgage pre-qualification nor pre-approval is a complete loan verification and commitment from a lender, why should buyers even bother? There are some reasons why!

The answers are tied to the fact that buyers can get a more informed idea about how much they can honestly afford to spend on a home by taking the time to speak with a lender. They’ll better understand which loan programs are best for them and their homes in their price range.

Buyers will also learn how much down payment is required upfront to secure their loan. Receiving pre-approval is a significant step in the real estate buying process, and doing so can help demonstrate to sellers that you are a motivated buyer.

Another crucial consideration is when the lender runs your credit. There is a possibility that errors on your credit report could derail your ability to get the best mortgage rate or even a mortgage altogether. Lenders want to see someone with good credit.

If this happens, you will at least have the capacity to try to fix your credit report errors. On a few occasions over the years working as a Realtor, I have seen these kinds of credit issues surface. It is not a position you want to be in when buying a home.

Submitting an Offer Without One is a Mistake!

While submitting your offer, the seller’s real estate agent relays to your agent that they have another offer on the home.

The other buyer has been mortgage pre-approved, and you haven’t. All you have to show is your flimsy mortgage pre-qualification letter. All things being equal, who do you think will get the house?

More than likely, it won’t be you because the seller will be unlikely to take a chance that you will be able to get the mortgage. Doing so would be a real gamble on the seller’s part!

As a top Real Estate agent, I will not even consider showing homes to a buyer who is not mortgage pre-approved. There is no point in showing homes that a buyer is not qualified to purchase.

Home sellers will not want unqualified buyers to walk through their houses. This is a complete waste of everyone’s time.

Likewise, unless it includes verifying the items mentioned previously, I will not accept a mortgage pre-qualification letter from a buyer offering on one of my client’s properties.

So if you are ready to purchase a home, get pre-approved for a mortgage! Getting a mortgage pre-approval will put you in the best position to buy the home of your dreams.

Hopefully, you are beginning to understand that the difference between mortgage pre-approval and pre-qualification is monumental!

How to Increase Your Chances of a Successful With a Home Loan

One of the most vital things you can do before buying a home is to get your financial house in order. Borrowers with a solid economic history backing them tend to get the best mortgage terms from lenders.

Understanding what a good credit score is to buy a house is essential.

If you know your financial status needs improvement, you may want to consider using a company such as Credit Karma. By using Credit Karma, you can improve your credit standing. Their free site offers tips and advice on making the best credit decisions.

Increasing your credit score takes some time. If you want to purchase a home, start working on it months in advance. You will be well on your way to getting mortgage preapproval and making a successful house purchase!

Use a Mortgage Calculator For Homebuying

If you are starting your home search and have not met with a lender yet, you can use a pre-approval mortgage calculator to fool around with what you qualify to purchase.

Nerd Wallet has a pre-approval calculator you can play around with.

FAQs

Does a Preapproval Guarantee a Full Loan Approval?

No, it does not guarantee loan approval. When a lender preapproves a borrower for a mortgage, it means that they have thoroughly assessed the borrower’s financial situation, creditworthiness, and ability to repay the loan. The lender has already verified the borrower’s income, employment history, and credit score, ensuring that they meet the necessary criteria for loan approval.

While there may still be some conditions to meet before finalizing the loan, such as providing additional documentation or completing a property appraisal, the preapproval significantly increases the likelihood of obtaining full loan approval. Borrowers can have confidence in their mortgage preapproval as a strong indication of eventual loan approval but it’s not guaranteed.

For example, a borrower’s status could change before closing. Financial issues and credit mistakes could cause a lender to revoke their commitment to lend.

Who Reviews to Documents to Provide Approval?

The responsibility typically falls on a mortgage broker or loan officer. These individuals are experts in the field of mortgage lending and have undergone rigorous training to ensure they possess the necessary skills and knowledge to accurately review and assess all relevant documentation.

They carefully examine various documents such as income statements, credit reports, employment history, and asset information to determine an applicant’s eligibility for preapproval. Their meticulous attention to detail and expertise in assessing financial information play a crucial role in the mortgage preapproval process, ensuring that only qualified applicants move forward in their homebuying journey.

While they don’t provide loan approval, they lay out a borrowers loan options, rates, and terms based on the lenders guidelines. The options will dictate how a borrower can achieve their goals.

How Does it Impact My Credit Score?

A preapproval for a mortgage typically has a minimal impact on your credit score. When you apply, the lender will perform a soft inquiry on your credit report, which does not negatively affect your score. This allows the lender to assess your creditworthiness and determine the maximum loan amount you qualify for.

However, if you apply for multiple preapprovals within a short period of time, it could potentially have a slight negative impact on your credit score due to the accumulation of multiple inquiries. It is crucial to note that once you proceed with an actual mortgage application, a hard inquiry will be conducted. This may have a temporary impact on your credit score.

Final Thoughts

It would help if you now had a much better understanding of how to get pre-approved for a mortgage. If you have any questions, feel free to reach out. I will answer your questions or put you in touch with my mortgage broker for assistance.

Other Useful Mortgage Resources:

Why a pre-approval is far more valuable to a home seller than a pre-qualification letter via Realtor.com

Use these additional resources to understand further the difference between a mortgage preapproval and a prequalification. Knowing why these two mortgage terms are different could put you in a better position to land the home you want!

About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on preapproval for a mortgage. He is an expert in mortgages, financing, moving, home improvement, and general real estate.

Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.

Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!

I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.