What is Mortgage Pre-Approval?

Mortgage preapproval occurs after you have contacted a lender, completed a mortgage application, supplied your mortgage documentation, and have been approved for a loan up to a certain amount.

To get a preapproval, the lender performs a credit check to verify your creditworthiness, which may impact your credit score. Note that if you are shopping between multiple lenders in a short timeframe (usually 45 days for newer FICO scoring models), the combined credit checks will count as a single inquiry.

Effectively, the term “preapproved” indicates that you have done the leg work to get approval for debt financing before wanting to make an offer on a specific property. Once you actually find the house you wish to buy, you may have a leg up on competing bids as you will not have to include the condition of securing financing on an offer. Although in hot markets, sellers will often demand pre-approvals and proof of funds before considering offers.

When Should I Get Pre-Approved?

The decision on when to get pre-approved depends on when you hope to buy, your financial situation, and your credit worthiness.

If you don’t plan to buy a home for 6 months, then getting pre-approved may be a waste of time and unnecessarily affect your credit score. Lenders often put an expiry date on mortgage pre-approval letters, typically making them valid for 60 to 90 days. If your pre-approval lapses by the time you are ready to buy, you will likely have to apply all over again.

On the other hand, getting pre-approved long before you are planning to buy may help you uncover any issues and allow you time to resolve them. It also gives you time to save for the down payment and any closing costs.

Documents Needed for Mortgage Pre-Approval

Along with your mortgage application, other documents may be requested to verify information in the application. Here’s a list of documents you may need to present in order to be pre-approved, or to secure final loan approval before closing:

  • 60 days of bank statements
  • 30 days of paystubs
  • W-2 tax returns from the previous two years
  • Schedule K-1 (Form 1065) for self-employed borrowers
  • Income tax returns
  • Asset account statements (retirement savings, stocks, bonds, mutual funds, etc.)
  • Driver’s license or U.S. passport
  • Divorce papers (to use alimony or child support as qualifying income)
  • Gift letter (if funding your down payment with a financial gift from a relative)

How long does pre-approval take?

Some online lenders can pre-approve you within hours, while other lenders could take several days. The timeline depends on the lender and the complexity of your finances.

What Happens Next?

A lender is required by law to provide you with a three-page document called a loan estimate within three business days of receiving your completed mortgage application. This paperwork includes:

  • whether the mortgage has been pre-approved
  • the loan amount, terms and type, interest rate and estimated interest and payments
  • the estimated closing costs (including any lender fees)
  • an estimate of property taxes and homeowner’s insurance
  • any special loan features such as balloon payments or an early prepayment penalty
  • specifies a maximum loan amount based on your financial picture to help you narrow down your home-buying budget

If you’re pre-approved for a mortgage, your loan file will eventually transfer to a loan underwriter who will verify your documentation against your mortgage application. The underwriter will also ensure you meet the borrower guidelines for the specific loan program you’re applying to.

Self-Employed Borrowers

If you’re a self-employed borrower, you might be asked to provide additional documents to show a consistent income and work history of at least two years. Some documents requested may include:

  • a profit/loss statement
  • business license
  • federal tax returns
  • financial statement, including your accountant’s report on those statements
  • bank statements for previous years (the exact amount of time depends on the lender)

What’s in a Pre-Approval Letter?

Once the lender has pre-approved you, and assuming you have placed on offer on a home, they will provide a letter indicating that you have the financial means to follow through the purchase. This letter typically includes:

  • the purchase price
  • the loan program
  • the interest rate
  • the loan amount
  • the down payment amount
  • the expiration date

Is the pre-approval binding to either side?

Getting a pre-approval doesn’t oblige you to borrow from a specific lender. When you’re ready to make an offer, you have the flexibility to choose the lender with the best rate and terms for your needs. On the other hand, however, a pre-approval does not guarantee that a lender will approve you for a mortgage, especially if your financial status changes during the time between pre-approval and underwriting.

What to do if you’re denied a mortgage?

After reviewing your mortgage application, a lender will usually give you one of three decisions: pre-approved, denied outright, or pre-approved with conditions. If you are denied outright, inquire as to why and seek assistance in coming up with a plan to resolve the factors which lead to the negative assessment. If you have been pre-approved with conditions, you might need to provide extra documentation or improve your metrics that support mortgage debt.

Once you know what you need to address, you can take the time and effort to improve your credit and financial health to get a better mortgage deal when you’re ready to embark on your home search. Doing so can save you significant money on mortgage pricing and ensure you get lower interest rates and terms when shopping for different lenders.

The bottom line

Go through the pre-approval process with several lenders to shop interest rates and find the best deal, but ensure its done within a 45-day window to ensure all credit checks count as one hard inquiry. Consulting with lenders before you start the home-buying process can save a lot of heartache later.