What Is Pre-Approval?

What Is Pre-Approval?

It’s often recommended to get pre-approved for a mortgage before shopping for a home. Pre-approval is a process in which you submit credit, income, and debt information to a lender for a preliminary loan application. While pre-approval is not a guarantee that you have the money to borrow, the lender will help you learn how much you can borrow, the rate you can receive, the type of loan program, and the terms of the loan. Pre-approval also gives you bargaining power when you make an offer on a home.

The Pre-Approval Process

The pre-approval process begins by providing basic information about yourself and your financial history. Your lender will also request your Social Security number to perform a credit check.

During the pre-approval process, your lender will verify your documentation and credit information to determine if you can be approved for a loan and the amount and terms. You will need the same documents to get pre-approved as you will during the actual loan process, including:

  • Pay stubs
  • W-2s for the last 2 years
  • Bank statements for all accounts for the last 2 months
  • Tax returns for the last two years
  • A list of monthly debts not listed on your credit report
  • Current real estate holdings and loan balances
  • Statements for other assets such as stocks and securities

Each lender uses its own standards to determine when a pre-approval letter will be issued. If you cannot get pre-approved, there are steps you can take before reapplying. Work to improve your credit score by paying down debt and correcting negative or incorrect information, when possible. Paying down debt will also improve your debt-to-income ratio. You may also need to increase the size of your down payment.

Why Get Pre-Approved?

According to most real estate professionals, offers that come without a pre-approval are often rejected right away. Without pre-approval, a lender has not verified that you can even get approved for a loan with sufficient income and credit.

The benefits of pre-approval go beyond making a solid offer on a home, however. The pre-approval process can also help you understand where you stand, how much you can borrow, and what you will pay for a mortgage. This can be invaluable ahead of a home search as you can narrow your focus and prepare a reasonable budget.

Pre-Approval Is Not a Loan Guarantee

Receiving a pre-approval letter does not guarantee a loan or a specific rate or term. Lenders may also require additional verification of your income and assets as well. Pre-approval letters are usually subject to change or cancellation if your financial situation changes. While a pre-approval is not an offer to lend, most people have no trouble qualifying for a mortgage with their lender after the pre-approval process.

Pre-Approval Is a No Obligation Process

You are under no obligation to take out a loan when you are pre-approved. You may decide to take out a mortgage under the terms you are offered, or you may go with a different lender. It’s also possible for a lender to not actually make a loan for which you have been pre-approved, although this usually only happens if circumstances change.