Wendy Wilson

If you are buying your home through a mortgage, it’s recommended that you get pre-approval for a mortgage. A pre-approval document shows the amount of money a lender is willing to give for your home buying. However, there are specific criteria your home should meet. Additionally, your financial situation should also not change drastically during the home shopping period.

Why should you get a pre-approval?

A mortgage pre-approval is not a compulsory requirement. However, getting a pre-approval makes the process of home-buying more efficient. The pre-approval process provides an opportunity to learn your loan options and budget.

By taking this step, you will be clear on your budget and the monthly repayments you can comfortably afford. Additionally, you will know if the houses within your budget are practical. You also save time as you can eliminate homes that are out of your budget range.

A pre-approval also shows sellers and real estate agents that you are serious and can afford a home. Sellers usually want to know if a buyer can follow through with the financing. A pre-approval, therefore, can work in your favor in comparison to a buyer without one.

Key factors for a pre-approval mortgage

A pre-approval is an examination of a buyer’s financial profile. A favorable financial profile quickens loan and mortgage pre-approval. Lenders base a pre-approval on the following key factors:

  • Assets and liabilities
  • Credit score
  • Credit history
  • Debt-to-income ratio
  • Employment history

Pre-qualification vs. Pre-approval

Most people use these two terms interchangeably. However, these terms don’t have the same meaning. Pre-qualification is an estimation of your loan amount—a pre-qualification results from a less prying credit check.

Pre-qualification involves a soft credit inquiry. No documentation is necessary for this process. Therefore, the lender only relies on your presentation of your financial situation.

Mortgage pre-qualification checklist

For a pre-qualification, the lender requires an overview of the following:

  • Your finances
  • Income
  • Debts

Pre-qualification is helpful when shopping and comparing loan terms. However, it carries no weight as sellers and real estate agents don’t take it seriously.

A pre-approval, however, is a more detailed process. You need to fill out a mortgage application and provide your social security number. The lender will use this number for a hard credit check. Other requirements include:

  • Bank account information
  • Assets
  • Debts
  • Income
  • Employment history
  • Past addresses

With a pre-approval, the lender has checked and verified your documents. Furthermore, the lender has approved a specific loan amount. A pre-approval thus is more valuable than a pre-qualification. 

Does mortgage pre-approval hurt your credit score?

During the pre-approval process, a lender assesses your creditworthiness. Then they determine the amount of money you can borrow and estimate your monthly payment. When you do a mortgage credit check, it is considered a hard inquiry on your credit report. This may impact your credit score, however, while you are browsing several lenders (approximately within a 45-day timeframe), this would be considered a single inquiry.

When should you get a pre-approval?

Pre-approval letters are valid for sixty to ninety days. The expiration time is because a buyer’s finances and credit profile may change. After expiry, you need to fill out a new mortgage application form for a new pre-approval. You also need to submit updated paperwork.

It is advisable that you seek a pre-approval six months to one year before a serious home search. Within this time, address any credit issues identified and improve your credit profile. You also get more time to save for down payment and closing costs.

» MORE: Find the best mortgage lenders

The pre-approval process

The time to pre-approve depends on the lender and your financial complexities. You can get a pre-approval within hours or even several days later. The first step in the application process is filling out a mortgage application. This application includes your identifying information and social security number.

The mortgage application has eight main sections, as listed below.

1. Type of mortgage and terms of the loan

Refers to the particular loan product you are seeking. This section includes the loan amount and terms. These terms include the loan repayment duration and the interest rate.

2. Property information and purpose of the loan

Includes the following information:

  • The address
  • The legal description of the property
  • Year of development
  • Loan purpose. For purchase, refinance, or construction
  • Intended type of residency. Whether primary, secondary, or investment

3. Borrower information

Your identifying information, including:

  • Full name
  • Date of birth
  • Social Security number
  • Years you enrolled in school
  • Marital status
  • Number of dependents
  • Address history

4. Employment information

This includes:

  • The name and contact information of current and past employers
  • Dates of employment
  • Title
  • Monthly income

5. Monthly income and combined housing expense information

This section includes:

  • Your base monthly income
  • Overtime
  • Bonuses
  • Commissions
  • Net rental income (if applicable)
  • Dividends or interest
  • Any other monthly income
  • Monthly combined housing expenses

6. Assets and liabilities

This includes:

  • All bank and credit union checking and savings accounts, including balance amounts
  • Life insurance
  • Stocks
  • Bonds
  • Retirement savings
  • Mutual funds accounts and corresponding values
  • Bank and investment account statements.
  • Liabilities and debts

7. Details of the transaction

This section is an overview of significant transaction details, including:

  • Purchase price
  • Loan amount
  • Value of improvements/repairs
  • Estimated closing cost
  • Buyer-paid discounts
  • Mortgage insurance (if applicable)

8. Declarations

Declarations are an inventory of:

  • Any judgments
  • Liens
  • Past bankruptcies or foreclosures
  • Pending lawsuits
  • Delinquent debts
  • State whether you’re a U.S. citizen or permanent resident
  • Intention to use your home as a primary residence

Next steps and documentation needs

Your lender will provide you with a three-page document (loan estimate). The law requires the lender to do so within three working days of receiving your application. The loan estimate shows if you have a pre-approval and outlines the following:

  • Loan amount
  • Terms and type of mortgage
  • Interest rate
  • Estimated interest and payments
  • Estimated closing costs (including any lender fees)
  • An estimate of property taxes and homeowner’s insurance
  • Highest loan amount

Once your application closes, your loan file goes to a loan underwriter. The underwriter will review all documents against the information on your mortgage application. The scrutiny ensures that you satisfy the requirements of each mortgage program and any special guidelines for each loan program.

You also need to put together documents to verify the information you provided. The documents required are the following:

  • Bank statement for the last 60 days
  • Pay stubs
  • Previous two years, W-2 tax returns
  • Schedule K-1 for self-employed borrowers
  • Income tax returns
  • Asset account statements
  • Driver’s license or U.S. passport

Factors impacting pre-application

It is essential that you understand what lenders assess in your financial profile. This information will help you maximize your chances for a pre-approval. These factors include:

  • Debt-to-income ratio
  • FHA maximum loan to value ratio
  • Credit history and score
  • Employment and income history

Loan types

The two main categories of mortgage loans include conforming and non-conforming. These two categories are further broken down into five sub-categories, including:

  • Conventional mortgages
  • Government-insured mortgages
  • Adjustable rates mortgages
  • Fixed rates mortgages
  • Jumbo mortgages

Pre-approval decisions

After reviewing your application, a lender makes any of the following three decisions:

  1. Pre-approved.
  2. Denied outright. In this case, the lender needs to explain to you the reason for this decision. It’s also necessary that the lender provide sources to resolve the issues that led to the denial.
  3. Pre-approved with conditions. In this scenario, the lender may require that you provide additional documentation. You may also need to lower your DTI ratio. The lender may require that you pay down some credit accounts. The condition could include withdrawing from a 401k for the down payment.

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