In a competitive housing market, a mortgage pre-approval letter communicates a sincere intention to purchase to the seller. It could also be the one thing that puts you a step above a buyer making a similar offer. Unfortunately, there is no way to guarantee pre-approval for a mortgage, especially considering lenders have varying standards. However, you can significantly increase your chances with adequate preparation and strong financial data.

Mortgage Pre-Approval Defined

Pre-approval for a mortgage is a document with provisional loan details, including interest rates and total, indicating the lender's intention to provide you with the loan. It does not guarantee you will receive the loan, but it gives you an idea of what funds are potentially available.

How It Helps You

Presenting a pre-approval letter says to a seller that your income, credit history, and other financial data are stable enough for the lender to find you tentatively eligible for a loan. It also tells your real estate agent what you can afford, guiding them to homes the lender will likely approve. 

Pre-Qualification vs. Pre-Approval

Pre-qualification is a step in the home-buying process that comes before pre-approval. It offers a vague estimate of what you could potentially borrow to buy a home based on the financial information you gave the lender and a basic credit check. 

Pre-approval is the next step to a loan contract and is more secure than a pre-qualification. During the pre-approval process, you provide all the documentation necessary to prove the spoken financial information you gave during the pre-qualifying process. The lender will also run a complete credit check.

Questions You Should Ask Before Applying

The annual growth rate for mortgage debt is relatively consistent at around 3.5% to 3.7%, but as the market changes, lenders may tighten their standards for loan approval. Therefore, before you schedule an appointment with a loan officer, you will benefit from asking yourself some questions about your financial status. For example:

• How many credit cards do you have? 

• Have you carried over a credit card balance for an extended period?

• How long have you held your current job position?

• Do you consistently pay your bills on or before the due date?

• Have you defaulted on a loan before?

• What is your current credit score?

• Do you know your debt-to-income ratio?

If you answer any of these questions negatively, it does not mean you should not speak with a loan officer. Every lender is different, and they may see potential and offer to help you, especially if you already have an established positive relationship with the institution.

Steps of the Pre-Approval Process

If you come prepared, the mortgage pre-approval process is relatively simple. With all the necessary financial documentation, you could receive notification of pre-approval or denial within a few days. However, if your finances are more complex, it could take longer. 

1. Know Your Financial Status Beforehand

Answer the previously mentioned questions about your financial status. Most banks and financial institutions offer members access to a basic credit report. Your debt-to-income ratio plays a significant role in the process. For example, if you already know you have a monthly debt exceeding half of your monthly income, your chances of approval are significantly lower. 

2. Provide Financial Data

Before speaking to a loan officer, come prepared with all the documentation. Lenders commonly require the following:

• Identification information, such as a driver's license or passport

• Payment history from the last 30 to 60 days

• Business financial statements if self-employed

• History of employment, including contact information

• Tax returns and W-2 forms from the previous two or three years

• Contact information for all insurance providers

• Bank statements, including checking, savings and retirement accounts

You can bring proof of current outstanding debt, such as credit card statements or your student loan payment history. However, the loan officer can typically see that in your credit check.

3. Complete the Application

Fill out the necessary paperwork through whatever medium the lender requires. Sometimes you can start this step before coming to the meeting. 

4. Await the Decision

The loan officer will then review all the financial data, verify your employment history and calculate your debt-to-income ratio. They will also determine the terms for your pre-approved loan and include that in your letter. 

Seeking Pre-Approval From More Than One Lender

Seeking pre-approval from more than one lender is a common practice, often recommended by financial experts. It allows you to compare fees, rates and other loan terms. However, you can typically stop at three lenders because there usually are only minor variances among lenders.

Cost of a Mortgage Pre-Approval

Typically, the pre-approval process is free of charge and does not damage your credit. Some lenders may charge an application fee or make you pay for the credit check. These prices will vary. However, they typically credit the amount back to you once you complete the loan process. 

FAQs About Mortgage Pre-Approval

What Do You Do If You Receive a Rejection?

According to the Equal Credit Opportunity Act, the lender must explain why they rejected your application. If the cause is your credit score, you can improve that over time by paying off debt. If it is your employment history, spend more time at your current position before applying again. 

Why Is It Important To Get Pre-Approved?

There are several benefits to seeking pre-approval:

• It makes you stand out in a seller's market.

• It helps you uncover potential issues in your financial status before taking on a loan.

• It gives you a better idea of the funding available while searching.

Pre-approval offers a sense of security during the buying process.

How Do You Choose the Right Lender?

When choosing a mortgage lender, you should consider the down payment, applicable fees, interest rate and the need for mortgage insurance.

When Should You Apply for a Mortgage Pre-Approval?

Mortgage pre-approval letters are typically only valid for 30 to 90 days, which is why you should apply as soon as you begin looking for a home and are serious about buying. 

Final Considerations for Mortgage Pre-Approval

As you collect pre-approval letters from various lenders, remember that pre-approval for a loan and signing a loan contract are not the same. Receiving a pre-approval letter does not obligate you to continue with those terms or that lender. Instead, take the opportunity to assess your plan for the future and choose a lender based on the terms that most appropriately suit your goals.