How to get pre-approved for a mortgage (and why it’s a must right now)

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A mortgage pre-approval can give you a good idea of how much home you can afford, and also make your offer more desirable to sellers. (iStock)

Buying a home is an involved process, from choosing a neighborhood to calculating your budget and, of course, actually looking at properties. Knowing how to get pre-approved for a mortgage can make the whole process simpler.

Think of it this way: You wouldn’t go grocery shopping without knowing how much cash you have in your wallet. Getting pre-approved for a mortgage means knowing how much money you likely have in your homebuying "wallet," saving you both time and heartache while shopping around.

Having a mortgage pre-approval can also make you a more desirable buyer, which is important in a competitive real estate market. If you’ve ever had a cashier help someone else while you searched for your debit card, you’ll understand why sellers prefer buyers who are already pre-approved for a mortgage loan.

Here’s what to know about getting pre-approved for a mortgage before buying your next home.

What is mortgage pre-approval?

A mortgage pre-approval is simply an offer from a mortgage lender saying they’re willing to loan you a certain amount of money for a new home purchase, provided you meet all their conditions for borrowing. This offer is meant to be an accurate indication of how much you can afford to borrow, since the lender will first look at important qualifying information such as your current assets, income, and credit reports/score.

But be aware: While a mortgage pre-approval is more precise than a prequalification, it’s not a guarantee that you’ll get a loan from that lender when all is said and done.

Depending on the home you choose and whether you meet those aforementioned borrowing conditions, the lender can decide not to give you a mortgage when you actually apply for one. However, getting a mortgage pre-approval is generally a good indication that you can be approved for a certain loan amount.

With Credible, you can compare rates, research how much home you can afford and generate a streamlined pre-approval letter in minutes.

Pre-approval vs. prequalification

A mortgage prequalification is a very quick and limited process. Generally, a lender will ask some questions about your personal finances — such as your household income, monthly expenses, current debt, etc. — to give you a rough idea of the mortgage loan type and amount that is ideal for you.

Prequalifications don’t usually involve a true credit check, also known as a hard inquiry, and can often be completed online in just a few minutes. In some cases, you can even be prequalified for a mortgage loan from a lender you’ve never even spoken with.

Pre-approval, on the other hand, takes the process up a notch, and is really the next-best thing to having an official mortgage loan contract in hand.

In order to offer you a pre-approval, a lender will usually begin the actual underwriting process. This involves filling out a mortgage application and speaking with a loan officer. A credit check will be run for you and your co-borrower (if you have one), and you will usually be required to provide certain documentation such as pay stubs, tax returns, and bank statements.

Pre-approval vs. approval

While a mortgage pre-approval is a great thing to have in-hand when shopping for a home, it’s not the final step. You’ll still need a mortgage loan approval in order to actually buy.

Getting approved for a mortgage is a bit more involved.

If you’ve been pre-approved for a home loan, your mortgage advisor will already have most of the documentation that’s needed for the rest of the mortgage underwriting process, such as financial statements and your completed application.

Why mortgage pre-approval is important

As you can see from everything we mentioned above, mortgage pre-approval is a pretty valuable part of the homebuying process.

First, it gives you a better idea of your borrowing power and how much home you can actually afford to buy. This may help you avoid falling in love with a home you won’t be approved for, or buying a house that your budget doesn’t realistically support.

Additionally, your real estate agent might even require a pre-approval letter. Since it gives you an edge over buyers who are only prequalified, having this letter can be a critical difference in a seller’s market. A pre-approval can help reassure sellers that if they accept your offer, you’ll be more likely to be able to secure financing.

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How to get pre-approved for a mortgage

Though mortgage pre-approval is more in-depth than prequalification, most lenders try to make the process as simple as possible.

You’ll generally need to fill out a mortgage application first, after which you’ll be assigned to a mortgage underwriter. They’ll let you know what sort of paperwork is needed, look over your provided documentation, run a credit check, and walk you through the process.

Ideally, you’ll want to shop around a bit, even during the lender pre-approval process. That way, you can compare lenders, choose a rate that works for you, and you may find that one lender is able to pre-approve you faster than others.

What are lender requirements for pre-approval?

You’ll need to provide a number of documents to your lender in order to get a mortgage pre-approval letter. These usually include:

Proof of income: You may be asked to provide a few months’ worth of pay stubs and/or previous tax returns in order to verify your declared household income.
Proof of assets: If you have savings accounts, retirement accounts, existing home equity, or other assets, these can be taken into consideration during mortgage underwriting. You may need to provide statements proving these assets.
Proof of employment: Lenders will want to know that you’re currently employed and earning a reliable income before they’ll pre-approve you for a large mortgage loan. This means you’ll likely need to provide your most recent pay stubs or, if you’re self-employed, recent contracts and invoices from clients.
Other personal documents: You'll probably need to submit basic personal documents, such as your driver's license, to show your lender that you are who you say you are.

Additionally, expect a potential lender to run your credit and that of any co-borrowers.

What factors affect pre-approval?

A few important factors determine whether you’ll be pre-approved for a mortgage — and at what interest rate.

Credit: Your credit score and credit history are often the most important factors when it comes to getting approved for a home mortgage, and securing a competitive rate. If you have a low credit score, limited credit history, or recent negative reports, you may be denied or offered a much higher APR on your home loan.
Debt-to-income ratio: If your debt burden is too large compared to your income, mortgage lenders may deny you a loan. Each lender has its own threshold in terms of debt-to-income (DTI), but generally you’ll want to stay below 40%. (In fact, 43% is generally accepted as the largest DTI you can have for a qualified mortgage approval.)
Income and employment history: Lenders want to know you’ll repay your loan on-time for the entire length of the loan. If you can’t demonstrate that you have a solid income and employment history, you’re less likely to be approved.
Loan-to-value ratio: Each lender has a loan-to-value (LTV) ratio limit, meaning they’ll only lend a certain percentage of the home’s purchase price compared to what it’s actually worth. If you’re buying a home above appraisal value, you’ll often need to cover the discrepancy with a larger down payment. Even if your home appraises for more than your purchase price, some lenders may not be willing to lend more than 80% or 90% of the value.

You can compare lenders and find a mortgage rate and terms that work for you through Credible.

When to get pre-approved for a mortgage

Getting pre-approved for a mortgage can be a helpful tool to have early on in the homebuying process, but there are many reasons not to do it too early.

Your mortgage pre-approval will expire, so be sure you know how long yours lasts. Generally, a pre-approval letter will be good for 60 to 90 days, though some lenders may extend this out to 120 days. If you don’t make an offer on a home before it expires, you’ll need to go through the entire process again.

However, you also don’t want to wait too long.

Getting pre-approved for a mortgage can take days or even a few weeks, in some cases. Be sure to leave yourself enough time to complete the process before you begin shopping for a home.

Also, if you know your credit needs work or think you might not qualify for other reasons, going through the pre-approval process early could identify what areas you need to work on to qualify for a better mortgage deal. It’s also valuable for narrowing down a home price range.

How long does mortgage pre-approval take?

Since mortgage pre-approval requires some level of underwriting, it takes longer than a prequalification.

Depending on how long it takes you to submit the required documentation and finalize your application, you can expect the pre-approval process to take 7 to 10 days. In some cases, it may even be longer.

What happens if you’re declined for pre-approval?

If you get denied for mortgage pre-approval, the lender will generally tell you why they denied your application. This could help you develop a strategy for bettering your chances of a future approval.

If your denial was due to credit issues, you can work to lower account balances or build up a longer payment history. If you were denied due to employment history or income, waiting until you’ve had a longer period of solid employment can be helpful -- so can finding other sources of additional income, such as a second job.

Other reasons for being declined may include your debt-to-income ratio (spend a few months aggressively paying off balances) or not qualifying on your income alone (try again with a co-borrower).

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What’s next after you get pre-approved?

So, you’ve been pre-approved for a new mortgage loan. Congratulations!

Now what?

First, give a copy of your pre-approval letter to your real estate agent. That way, they can share it with sellers’ agents when you’re ready to make an offer.

Next, gather documents that you’ll need when you actually apply for a mortgage loan, including your W-2s, bank statements, federal tax returns, recent pay stubs, and info on your debts and liabilities.

Lastly, just because you’re pre-approved doesn’t mean you’re locked in. In the meantime, don’t make any big financial changes, such as quitting a job or putting a big purchase on credit. If you can avoid opening new accounts or closing existing lines of credit, that’s wise, too.

A mortgage pre-approval letter can be an excellent tool when shopping for a new home. The process may require a bit of work on your end, but a pre-approval letter can make you an appealing buyer — and make the official mortgage application process a bit simpler.

When you’re ready to apply for a mortgage, you can use Credible to compare rates from multiple lenders and submit an online application for approval.