Buying a home can be a scary prospect. After all, you’re about to make a huge decision that will affect your family’s finances for the next 15 to 30 years.
But here’s something that might ease your mind a bit: getting a mortgage pre-approval can be one of the best ways to set yourself up for home buying success.
A pre-approval letter for a mortgage gives you an edge over other buyers in a competitive market. It streamlines the home-buying process. Finally, it allows you to take a deep look at your finances and what you can really afford before you sign on the dotted line.
Mortgage Pre-Qualification vs. Pre-Approval
When you apply for a mortgage, a lender will take a close look at two things: your personal financial information and the home you’ll be buying. You might not know which home you’ll be buying quite yet, but you can start the conversation with lenders about your financial situation to get the ball rolling.
You might hear the terms “pre-qualification” and “pre-approval” thrown around when it comes to getting your mortgage financing in order. While each lender is different and a few even use these terms interchangeably, the truth is that they generally mean two separate things.
What is mortgage pre-qualification?
Getting pre-qualified is the first step when contacting a potential lender you’re interested in working with.
When you get pre-qualified for a loan, a lender will ask for your financial details. Again, each lender is different. Generally, they’ll ask for things like your income, employment history, and estimated credit score.
Based on those numbers, they’ll give you a letter stating what kind of loans you may qualify for. This will include details such as how much home you can afford, your projected interest rates, etc.
A pre-qualification letter is basically a quote. In other words, it’s a rough estimate of what you might be approved for.
If you do decide to apply for a mortgage, your terms may or may not be the same as in the pre-qualification letter based on what actually turns up in the underwriting process. For example, if you estimate your credit score to be much higher than it actually is, you might get a higher interest rate than what the pre-qualification letter states.
What is mortgage pre-approval?
Getting a mortgage pre-approval is the next step toward applying for a loan.
In this case, the lender will actually verify your information, rather than just taking your word for it. In other words, it’s a bigger commitment toward applying for a loan, even though it’s not a mortgage application just yet.
It’s important to note that your lender will run a credit check at this point. This will show up as a credit inquiry on your credit report, which can drop your credit score by a few points.
If you shop around with multiple lenders to find the best rates, you might be worried that this will harm your credit score. And normally, it would.
However, credit reporting agencies have special rules that treat multiple mortgage inquiries within a 45-day window as a single credit inquiry. As long as your first and last credit inquiry all happen within that 45-day window, you can get pre-approved with as many lenders as you want.
Compared to a pre-qualification, a pre-approval provides a more accurate estimate. Although it’s not a guarantee, there is a good chance you’ll be approved for your mortgage loan.
Getting pre-approved for a mortgage gives you an advantage in competitive markets because it shows sellers that you’re serious. If a seller gets multiple offers and yours comes with pre-approved financing, you may be more likely to snag that house.
Pre-approval letters generally last for 60 to 90 days after they’re issued. If you haven’t found a house you like by then, you’ll need to go through the pre-approval process again.
Why you need both and when to get them
If you’re not sure yet whether you might qualify for a mortgage, getting a pre-qualification letter is a good first step. Since it doesn’t require a credit check, it’s the least invasive way to check your options if you’re not quite sure you’re ready to buy a house.
Getting a pre-qualification letter will also help you determine the range of homes you can afford and get an estimate of your monthly costs. You can then plug these numbers into your budget to see what your cash flow would look like with different scenarios.
Be sure to consider other non-mortgage costs as well when you’re in this planning stage. Being “house poor” is a very common first-time homebuyer mistake that you don’t want to make.
This happens when you’ve been approved for — and bought — more home than you can afford. When that happens, your monthly mortgage payment is typically so high that you can’t afford other things, like saving up for home maintenance, repair costs, retirement, or your children’s education.
It’s best to get pre-approved for a mortgage when you’re ready to buy a home. In this case, you’ve already done the math and know you can afford a home. You’re making sure you can get the financing before you start looking.
Wait to start shopping until you have a pre-approval letter in hand. After all, you don’t want to fall in love with a home that’s outside of your budget. Even worse would be falling in love with a newly-listed home that’s gotten multiple offers from other pre-approved buyers — potentially dropping your own offer to the bottom of the list.
Steps to Get Approved for a Mortgage
Getting approved for a mortgage takes several steps:
Step 1: Gather financial information
You’ll need to provide lenders with a lot of information as you go along these steps. To make the process as smooth as possible, gather these documents in advance so you’re ready to hand them over when needed.
- Two years’ worth of federal tax returns or tax transcripts
- Two years’ worth of W2 forms
- Recent pay stub (within 30 days)
- Two most recent bank statements
- Documents proving other income sources (side hustles, alimony, etc.)
- Two most recent statements for any accounts holding your down payment savings (if not shown on your bank statements)
- Documentation from any recent name changes
- A statement from anyone who gave you down payment money as a gift
Keep in mind that each lender is different, so you may need to provide additional documents throughout the process.
Step 2: Get pre-qualified
If you’re still unsure if you’re ready to buy a home, you’ll still want to get pre-qualified.
You might not need to provide any proof of your financial standing, such as your income and credit score. However, getting those documents ahead of time will make things easier down the road. It’ll also make sure your estimate is as accurate as possible.
Once you’re ready to start the home-buying process, it’s time to get pre-approved for a loan.
Step 3: Get pre-approved
Here’s where you’ll need all of the documents from Step 1. Getting a mortgage pre-approval may take just a few minutes. However, it can also take up to 24 hours or longer for lenders to verify all your information.
If a red flag turns up — such as a low credit score or problems with your down payment money — you could even be denied for pre-approval until you’ve fixed the problem. In the case of credit scores, it can take months or years to get your number where it needs to be.
That’s why it’s a good idea to get pre-approved as soon as you’re ready to start home shopping. You don’t want any surprises. But if something unexpected does happen, you want as much time as possible to fix it.
It’s a good idea to get mortgage pre-approval offers from multiple lenders. Three lenders is generally a good number to check with, although you can check with as many as you want. Remember, though, it’s a good idea to limit your pre-approval shopping to a 45-day window so you don’t get multiple hits to your credit.
Once you have a pre-approval letter — or multiple pre-approval letters — in hand, it’s time to find your home.
Step 4: Find your house
Now comes the fun part: shopping for a home. If you haven’t already, now is a good time to consult with a realtor.
Generally, pre-approval letters are good for 60-90 days. Your letter should state when it expires.
There’s no need to rush, though. Buying a home is a big decision; you don’t want to settle on a home just because your pre-approval letter will expire soon. If your letter does expire, you’ll need to go through the pre-approval process again.
This will result in another credit inquiry on your report. However, it’s a small price to pay for buying the right home for you.
Step 5: Make an offer
Once you’ve found a home you love that’s within your budget, the next step is to make an offer.
Your realtor will guide you throughout this stage. If your offer is accepted, you’ll schedule an inspection on the home and negotiate the final price. Once you have this number finalized, it’s time to finalize your mortgage.
Step 6: Apply for a mortgage
You have a pre-approval letter already, but that doesn’t tell you all the details. The next step is to apply for the real thing. Applying for a loan doesn’t mean you have to accept it. Therefore, you can apply with multiple lenders.
Each lender will give you a Loan Estimate document. This will include all the information you need to compare loan offers, such as prepayment penalties, closing costs, interest rates, and your final monthly payment amount.
You can use the Loan Estimate documents to comparison shop among lenders. Again, as long as you complete any credit checks for pre-approval letters and Loan Estimates within 45 days, they’ll all be recorded as a single inquiry on your credit report.
Step 7: Sign the loan documents
The final step is an easy one: choose which loan offer meets your needs and notify the lender that you’ll be moving forward with this loan.
All that’s left is to sign the paperwork on the dotted line and complete any other closing requirements. Your realtor will help you navigate this process until you have your new keys in hand.
When it comes to buying a home, following these steps will make the journey as smooth as possible. All you have to worry about now is keeping up with your home and enjoying your new space for many years to come.