Mortgage Pre-Approval: What It Is & How to Get Pre-Approved

What Is Mortgage Pre-Approval?

A mortgage pre-approval is a lender’s written confirmation that you’re likely eligible for a home loan up to a specific amount based on a review of your financial information. When you apply for pre-approval, a mortgage lender evaluates your income, credit score, assets, and debts to determine which home loans you may qualify for, how much you could borrow, and the potential interest rate for your loan.

Home buyers should get a mortgage pre-approval before they start shopping for a home. Knowing how much you can afford can make the home-buying process easier because you’ll only look at houses within your budget. In addition, it will help your realtor find more homes for you to look at and give you bargaining power when it comes to making an offer.

Many sellers prefer buyers to have mortgage pre-approvals before making an offer because it gives them more trust that the sale will close. Getting pre-approved for a mortgage can also streamline the closing process, helping things move quicker for both the buyer and seller.

Mortgage Pre-Approval vs. Pre-Qualification

Pre-approval vs pre-qualification comes down to accuracy and verification, which is especially important for first-time home buyers. A mortgage pre-qualification is a quick, early estimate of how much you might be able to borrow based on self-reported information like income. Lenders don’t verify documents or pull your credit, so the numbers are rough and meant only for initial planning.

A mortgage pre-approval is more thorough and reliable. The lender reviews your credit score, income, assets, and debts, verifies mortgage pre-approval documents such as pay stubs and bank statements, and runs a hard credit check. Because it’s based on confirmed financial information, a mortgage loan pre-approval provides a much clearer picture of what you can afford and carries more weight when making an offer on a home.

Mortgage Pre-Approval vs. Final Approval

The difference between mortgage pre-approval and final approval is that pre-approval is an early estimate of how much you may be able to borrow, while final approval is the lender’s official decision to fund your loan. A mortgage pre-approval is based on an initial review of your finances and helps you set a budget before making an offer, but it does not guarantee you’ll receive the loan or the exact amount.

Final approval happens after you’ve made an offer on a home and completed the full mortgage application. At this stage, the lender goes through full underwriting, verifies your income, credit, debts, employment, and down payment funds, and evaluates the property. This includes a home appraisal, a title review, and confirmation that the property meets loan-specific requirements. Only after these checks are complete does the lender issue final approval and commit to the mortgage.

When to Get Pre-Approved for a Loan

Buyers might consider getting a pre-approval letter in the early days of house hunting. It’s usually best to apply for pre-approval before you start looking for a home because it will help set your expectations by telling you how much you’ll likely be able to borrow.

Pre-approval letters are only valid for a certain amount of time, usually 30-90 days. Therefore, if you’re only considering whether now is the right time to purchase a home, you might want to consider a pre-qualification instead. Then, when you’re ready to begin house hunting, you can get a pre-approval letter to make you a more appealing buyer to sellers.

A mortgage pre-approval will also help realtors find you a home based on your budget while letting agents and sellers know you’re serious about any offers you make on a home.

If, for some reason, you just haven’t found your dream home yet and your pre-approval letter expires, you can request a renewal by contacting your lender, giving you more time to find the perfect house for you and your family.

Benefits of Getting Pre-Approved for a Mortgage

Key benefits of getting pre-approved for a mortgage include the following:

• Understand your budget: Getting pre-approved helps you clearly understand how much home you can realistically afford based on your income, credit, debts, and down payment. Instead of guessing, you’ll have a defined price range that guides your home search and prevents you from wasting time on properties outside of your budget. It can also highlight steps you can take to potentially increase your pre-approval amount and expand your buying options.
• Demonstrate you’re a serious and competitive buyer: A pre-approval letter shows sellers and their agents that you’re a competitive buyer and demonstrates that a lender might be willing to let you borrow up to a certain amount. If that amount falls within the asking price range, buyers will be more willing to accept your offer.
• Get a feel for working with different lenders and loan types: There are so many different types of mortgage loans and lenders that the process of buying a home can seem intimidating, especially if it’s something you’ve never done before. Getting mortgage pre-approval gives you a preview of the mortgage loan process to make it less stressful when you finally complete your mortgage application.
• More purchasing power: Having a mortgage pre-approval letter gives you more purchasing power because it demonstrates that you’re a serious buyer, making you more attractive to sellers. At the same time, it gives you negotiating power because sellers know you’re already pre-approved for a certain amount, making them more likely to engage with you.
• Identify credit issues and other problems before you’re too deep in the process: When you get pre-approved for a mortgage, the lender verifies some of your information to give you an estimated loan amount and interest rate based on your credit score. If your pre-approval is denied, most lenders will tell you why. The mortgage pre-approval process can help you identify credit or financial issues that affect your ability to get a home loan or a particular loan amount.
• Saves you time: When you know your budget for a home, you won’t waste time looking at homes you can’t afford. Instead, your pre-approval letter can help you save time when house hunting because you’ll only look at homes you can afford.
• Potential for faster closing: A mortgage pre-approval may help you close on a home loan faster since you won’t have to wait for some of the documentation to be processed once you make an offer and apply for the loan. Lenders will need to re-check your financial information, including income, assets, debt, and credit score. However, having pre-approval can speed up the process because you already have a working relationship with a lender.

Factors That Impact Home Loan Pre-Approval

While home loan pre-approval is not the same as final mortgage approval, you can still be denied for a home loan. Lenders take several factors into consideration when determining whether you qualify for a particular home loan and for how much.

Credit history

Your credit history consists of all the information related to your debts, including accounts, balances, and payment history. The credit score is a numerical figure used to describe this information, and the higher the score, the better.

Lenders want to know you have a history of paying your debts on time. If you have a poor payment history or significant amounts of debt, it may indicate that you have poor money management skills, making them less likely to lend to you.

Your credit score can also affect your loan eligibility and amount. Lenders typically prefer a fair or better credit score. However, a higher credit score can increase your loan amount while decreasing your interest rate, helping you afford to purchase a more expensive home while paying less in interest over the life of the loan.

Down payment

The down payment is the amount you pay upfront when securing a home loan. The down payment amount required depends on your specific type of loan. For instance, some loans allow for as low as 3.5% down, while financing options like VA loans and USDA loans require no down payment at all.

Keep in mind that the lower your down payment, the higher your loan amount will be, meaning you’ll need to borrow more and pay more in interest over the loan term. At the same time, if you don’t make a large enough down payment, you may be required to pay private mortgage insurance (PMI), which will make your loan even more expensive.

Lenders may verify your down payment amount in order to grant you home loan pre-approval to ensure you can afford it while giving you the most accurate information regarding the loan amount, terms and conditions, and interest rate.

Income and employment

Apart from the down payment amount and credit score, income is one of the most important factors lenders use to determine your home loan eligibility and amount. You must have a steady, reliable stream of income to demonstrate your ability to repay a mortgage loan.

Ultimately, the purpose of verifying your income is to ensure you earn enough every month to repay your mortgage debt. However, in addition to verifying your income, lenders must determine your employment history.

In general, lenders like to see that you’ve been in the same job for at least two years, but there are some caveats. For instance, lenders may be willing to overlook the fact you haven’t been at your job for at least two years if you’ve stayed within the same industry or job type.

DTI ratio

Your debt-to-income (DTI) ratio compares your income to debts, determining the percentage of your gross monthly income that goes toward paying those debts. Lenders like to see borrowers have a DTI of no more than 43%, but the lower, the better because it indicates less of your income goes toward paying debts, so you’ll have more to pay your mortgage and some left over for saving. If you have a high DTI ratio, it can make it more difficult to qualify for the loan you want and may lead to a higher interest rate.

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How to Get Pre-Approved for a Mortgage

Here’s what the process for getting pre-approved for a mortgage loan looks like:

1. Check your credit score and DTI ratio

Before applying for mortgage pre-approval, you should check your credit score and calculate your DTI ratio. Since these factors play a major role in determining your eligibility for a loan, loan amount, and interest rate, you should have a basic understanding of your current debt situation.

If possible, try to reduce your debt as much as possible before applying for mortgage pre-approval because it will increase the likelihood of getting approved for a higher amount. If you have a low credit score and a high DTI, consider waiting to apply for mortgage pre-approval until you’ve improved your financial situation.

While some lenders perform soft credit inquiries, others perform hard checks that can temporarily affect your credit score, so it might not be worth it to apply for pre-approval until you’ve increased your score enough to satisfy a lender’s requirements.

2. Choose a loan type

Most lenders offer several different types of loans to satisfy the needs of different buyers. For instance, you’ll find FHA loans, VA loans, USDA loans, non-QM loans, and conventional loans. If you’re eligible, pursuing a VA loan pre-approval can be especially beneficial due to features like lower down payment requirements and more flexible credit guidelines.

3. Fill out a mortgage application

When you’re ready to begin the mortgage pre-approval process, you can fill out a loan application online or begin an application by contacting your chosen lender. Depending on your needs, your lender may also allow you to meet in person at the office to go over the process and help you choose the best loan option for you based on your needs.

The mortgage application will be less comprehensive for a pre-approval than a final approval mortgage because lenders don’t need to learn about the property. Instead, they need information about the borrower and their financial situation, including income, assets, and debt obligations.

4. Provide necessary documentation

While a mortgage pre-qualification is largely based on self-reported information, a pre-approval requires documentation the lender can use to verify the information you provide about your finances. Your lender will need documentation to verify your:

• Income
• Employment history
• Assets
• Credit history
• DTI

Knowing what documentation you need for mortgage pre-approval can help streamline the process, so it’s usually best to contact your lender ahead of time and ask. In most cases, your lender will ask for the following:

• Pay stubs and W-2s
• Tax returns
• Bank statements
• Driver’s license & Social Security number (SSN)

It’s important to note that the type of documentation you need to provide will vary by loan type. For instance, if you’re applying for non-QM home loan pre-approval, your lender may not ask for pay stubs or W-2s, especially if you’re self-employed and don’t have those documents.

Streamline the Mortgage Pre-Approval Process

A mortgage pre-approval is the first step to purchasing a home. You should never skip this part of the process because it can help you determine how much you can afford to spend on a home while giving you more negotiating power and making your offer more attractive to sellers.

Once a lender verifies your finances, you’ll have a more accurate estimate of how much you can afford to borrow. Then, with this knowledge, you can go house hunting within your budget, making you more likely to receive final mortgage approval when you find your dream home.

Getting pre-approved before making an offer on a home benefits lenders, sellers, and borrowers. Reach out if you have questions about how to get pre-approved for a home loan or get pre-approved today by starting the process online.

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 24 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 12 years in business.