What Is Mortgage Pre-approval?
Getting a mortgage loan pre-approval is often the first step in the home buying process, helping you determine your price range and giving you confidence when making offers.
In this article, we’ll guide you through the mortgage loan pre-approval process, how it differs from pre-qualification, and share tips to make the pre-approval process smoother.
We’ll also explain why getting pre-approved can help you stand out as a serious buyer in a competitive market.
If you’re ready to take this first step towards owning your new home, apply for mortgage pre-approval today and let us help you get one step closer to securing your home purchase!
What Is a Mortgage Preapproval?
A mortgage loan pre-approval is essentially a green light from a lender, indicating that you qualify for a home loan up to a specific amount. During the mortgage pre-approval process, lenders like Rate examine your income, assets, bank accounts, and financial documents.
The result of this process is a mortgage preapproval letter, which shows sellers and real estate agents that you’re a serious buyer.
Underwriting is another key aspect of the pre-approval process. This is where the lender conducts a thorough examination of your financial information, including a review of your credit report, income, and monthly debt.
For a more competitive edge, consider our PowerBid Approval mortgage, which helps you compete with cash buyers and gives you access to our 5 minute approvals that can help you close fast.*
Why Getting a Mortgage Pre-approval is Important
Getting preapproved for a mortgage offers several benefits that can make your home-buying experience smoother and more efficient.
Here’s how a preapproval can strengthen your offer, clarify your budget, and simplify the loan process.
Strengthens Your Offer
Having a preapproval shows home sellers that you are a serious buyer who can secure financing, making your offer stand out in competitive markets. This can give you an edge over other buyers, even cash buyers, and increase the likelihood of your offer being accepted, even if it’s not the highest bid.
Clarifies Your Budget
A preapproval sets a clear home-buying budget by determining how much a lender is willing to lend, based on your financial situation. This helps you avoid wasting time looking at homes outside your price range and ensures you stay focused on properties you can afford.
Makes the Loan Process Smoother
Since the preapproval involves submitting financial documents and undergoing a credit check early on, it reduces the amount of paperwork needed during the loan approval process. This allows for a faster and more streamlined experience once your offer is accepted and you move towards closing the loan.
How Far in Advance Can You Get Pre-approved for a Mortgage?
Timing is everything. Ideally, you want to get pre-approved about three to six months before you start house hunting.
Pre-approval vs Pre-qualification: Key Differences
What’s the Difference Between Pre-approval and Pre-qualification?
Understanding the difference between pre-approval and pre-qualification is crucial for future homeowners.
Both processes estimate the loan amount you may qualify for, but have differences in depth and accuracy.
Mortgage Pre-Approval:
Mortgage pre-approval is a more detailed and accurate assessment of your financial situation.
To get pre-approved, you’ll need to submit pay stubs, W-2s, financial documents, and bank accounts statements to verify your income and assets.
If approved, the lender will then provide a mortgage pre-approval letter stating the specific loan amount, expected interest rate, and the terms of the loan. This pre-approval puts you in a strong position to make an offer.
Mortgage Pre-qualification:
Mortgage pre-qualification is a preliminary assessment of your financial situation. It provides an estimate of your borrowing ability based on self-reported information, such as income, debt, and available funds for a down payment and closing costs.
Getting prequalified is useful for people who want a general idea of their borrowing potential but are not yet ready to start house hunting.
How Do I Prequalify for a Home Loan?
Pre-qualifying is simple. Most mortgage lenders allow you to do it online in just minutes.
How Long Does Pre-qualification Last?
Pre-qualification doesn’t have an official expiration date, but it’s usually valid for around 60 to 90 days.
Steps to Get Pre-approved for a Mortgage
The mortgage loan pre-approval process is a critical step in the home-buying journey. It involves a thorough examination of your financial situation and helps determine your borrowing ability. Here’s a step-by-step guide of how to get a pre-approval for a mortgage:
5 Steps to Getting a Mortgage Preapproval
1. Gather Your Documents
To begin the loan application process, you need to collect and submit various financial documents that provide a comprehensive view of your financial health.
What Documents Do I Need to Get Preapproved for a Home Loan?
Here’s the core list:
- Proof of Income: Recent pay stubs, W-2 statements, and tax returns from the past two years.
- Proof of Assets: Bank statements, investment account summaries, and any other documents proving you have the necessary funds for a down purchase price and closing costs.
- Credit History: A credit report that shows your credit score and any outstanding monthly debts.
- Identification: A driver’s license, passport, or other government-issued ID, along with your Social Security number.
2. Complete a Mortgage Application
Fill out our digital loan application form with your financial details, and the we will check your credit score, employment history, and bank accounts. This application process includes providing all your financial information and selecting a loan term that works best for you.
3. Credit Check
Your lender will conduct a credit inquiry, which will result in a small dip in your score. However, this credit inquiry is necessary to secure a competitive mortgage rate.
Does a Preapproval Hurt Your Credit Score?
Yes, but only slightly. When lenders pull your credit for pre-approval, it’s called a hard inquiry. This can shave off a few points from your score.
4. Receive Your Loan Estimate and Get Your Pre-approval Letter
Once you've submitted all your financial information, you’ll receive a loan estimate within three business days. This document outlines the potential costs associated with the loan, including the interest rate, monthly payment, and closing costs.
Once pre-approved, we’ll issue a mortgage pre-approval letter. This letter states the maximum loan amount and loan term you are likely to get approved for and the potential terms of the loan.
5. Understand the Validity of Pre-approval
Pre-approval letters typically last for about 90 days. After that, you may need to renew if you haven’t found a house yet.
What Lenders Consider During Pre-approval
What Determines Pre-approval for a Home Loan?
Lenders look into your eligibility based on several factors:
Credit Score
A high score shows lenders that you’re a responsible borrower. This means you’ll usually get better terms and a lower monthly payment. On the other hand, if your score is lower, it signals more risk, and you might face higher interest rates or even a rejection.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is the percentage of your monthly income that goes toward paying debts. To improve your chances of loan approval, your DTI should ideally be below 36%.
Employment History
Lenders like to see stable income, especially for those who are self-employed. If you’re self-employed, it may take extra financial documents and a higher monthly mortgage payment to secure pre-approval.
Common Reasons for Mortgage Preapproval Denials
Credit Score Challenges
While there may be financing options if you have credit score challenges, a lower credit score can signal higher risk to lenders, which can lead to preapproval denial due to concerns about the borrower’s ability to repay the loan.
High Debt-to-Income Ratio
A high debt-to-income ratio indicates that a borrower has too much existing debt compared to their income, making it difficult to qualify for additional mortgage payments.
Insufficient Documentation
Incomplete or missing documentation can prevent lenders from verifying your financial stability and may result in denial of your preapproval application.
How to Maximize Your Mortgage Pre-approval
Look to Negotiate Mortgage Rates
Mortgage rates aren’t set in stone and this is good to know if you’re a first-time homebuyer.
Comparing offers from multiple lenders can help you find the best rate, which can significantly lower your monthly payment over the life of the loan.
How to Improve Your Negotiation Position
Whether you're a first-time home buyer or looking to refinance, a strong credit score and a low debt-to-income ratio helps you get the best mortgage terms available. Having a solid down payment can also make you more appealing to lenders, putting you in a better position to negotiate.
Avoid Major Financial Changes
During the pre-approval process, avoid big financial shifts. Don’t open new credit card accounts, take out a car loan, or make any major purchases. These changes could affect your debt-to-income ratio and credit score, which in turn could jeopardize your pre-approval.
Monitor Your Credit Report
Keep an eye on your credit report, especially during the pre-approval process. Look for any inaccuracies or signs of identity theft that could negatively impact your score.
What to Do After Getting Preapproved
Start House Hunting
Once you’re preapproved, start working with a licensed real estate agent to find homes that match your pre-approved budget and homeownership goals.
Make an Offer
When you find the right home, use your preapproval letter to make a strong offer and show sellers that you’re a serious buyer. Your preapproval from a lender can set you apart, especially in competitive markets.
Complete Full Mortgage Application
After your offer is accepted, complete the full mortgage application with your lender, verifying all information to move one step closer to finalizing your homeownership process.
How to Get Started With Your Pre-approval Process Today
Start your journey now by completing our upfront digital mortgage application and discover how easy and quick it is to get pre-approved. Our loan officers can help you explore all your mortgage options whether you're looking at FHA loans, conventional loans, or planning to refinance.
With Rate’s Same Day Mortgage, you can get approved in just one day, giving you the competitive edge you need in today’s fast-paced market!
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.
*Rate, Inc. 5-minute pre-approval refers to an automated underwriting review of borrower submitted loan documentation and subsequent pre-approval and should not suggest to a borrower thatRate, Inc. has fully funded or approved the borrowers mortgage application within 5 minutes. Rate, Inc. cannot guarantee that a loan will be approved or that a closing will occur within a specific timeframe. Not all borrowers will be approved. Borrower's interest rate will depend upon the specific characteristics of borrower's loan transaction, credit profile and other criteria. Restrictions apply.