Mortgage Pre-Approval: What You Need to Know

By Bill Lyons | Updated on February 2, 2024

When shopping for a house, it helps to know how much you can afford to spend. A mortgage pre-approval helps you understand how much of a home loan you may qualify for and gives you more power when making an offer on your dream home.

The mortgage pre-approval process works similarly to getting a mortgage, but it’s less comprehensive. With pre-approval, a lender will review your financial information, credit score, and employment history to determine whether you qualify for a particular loan and for how much.

Then, with your pre-approval letter, you can work with a realtor to look for your dream home. This can give you a competitive edge, as sellers often like to see you’ve at least been pre-approved for a certain amount to ensure you’re likely to get approved for a mortgage loan.

Keep reading to learn more about home loan pre-approval and how it works.

What Is Mortgage Pre-Approval?

A pre-approved mortgage means a lender has reviewed your financial history and determined you may qualify for a loan up to a certain amount. When you apply for pre-approval, your mortgage lender will review your income, credit score, and assets to determine the types of home loans you qualify for and how much you might be able to borrow. Through the pre-approval process, you can also get the potential interest rate for the loan you want.

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

A mortgage pre-approval and pre-qualification are not the same thing. Unfortunately, first-time home buyers don’t always know this. While they’re both documents that tell you how much you might be able to borrow, the mortgage pre-qualification is less accurate and should only be used very early on in the process to determine whether you might qualify for a particular loan or amount based on basic financial information.

A mortgage pre-qualification can determine an estimated amount you might be able to borrow when you complete a full mortgage application. However, at this stage, the lender doesn’t have much information about you or your finances. With a pre-qualification, lenders don’t pull your credit history or review debts. Instead, they make a qualification based on the information you provide them with, such as your income.

Without important information like your credit score, lenders can’t give you an accurate estimate of how much money you can borrow to purchase a home. In addition, since interest rates are so closely related to your credit score and other financial metrics, it’s virtually impossible for them to determine how much house you can afford.

The pre-qualification is an initial review; you won’t need to provide supporting documents like pay stubs or bank statements. Instead, all the information you provide is self-reported, which can make it even more inaccurate.

Conversely, mortgage pre-approvals are more comprehensive, giving you a more accurate estimate of the amount you can afford to borrow based on factors like your credit score and supporting documentation like bank statements to prove your income.

A home loan pre-approval also requires a hard credit check that allows the lender to see your credit score and other debts you currently have. Given that a home loan pre-approval requires a credit check and the verification of certain financial information, it’s more accurate than a pre-qualification because it doesn’t rely on self-reporting.

Mortgage pre-approval vs. final approval

Unfortunately, getting pre-approved for a mortgage or a certain amount doesn’t guarantee that you’ll get final approval for the mortgage loan or the exact amount you received in the pre-approval.

Pre-approvals are designed to help you understand how much a lender might be willing to let you borrow. However, because they don’t go through the entire underwriting process, it’s impossible for a lender to get a true, accurate picture of your financial situation.

Only when you complete the mortgage application can lenders truly determine whether you qualify for a loan and how much you can borrow.

Remember, the mortgage pre-approval process takes place before you make an offer on a home. You use this information to determine your budget and start shopping for properties you can afford. Only after you make an offer on a home do you complete the mortgage application to determine whether you can truly afford to purchase the home based on information like your down payment amount, credit score, employment history, debts, income, and information about the property. At this point, the lender will review information about you as the borrower and the property you wish to purchase with the home loan.

Final approval of a mortgage loan requires your lender to appraise the home to ensure you don’t overpay for the property. In addition, the lender must ensure the seller actually owns the property, with no liens or claims against it.

Also, since some loans like FHA and VA loans call for the property to meet certain requirements, the lender will review all the necessary documentation to ensure the home qualifies for the loan.

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

The most significant benefit of getting pre-approved for a mortgage is that it helps you understand what you can afford. With your pre-approval letter in hand, you can determine your overall budget. Remember, getting pre-approved for a certain amount doesn’t mean you have to spend all of it. Instead, this number gives you a rough idea of how much you can spend based on your financial situation.

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

• 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 money 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

How you get pre-approved for a mortgage typically depends on the lender’s process. Many lenders allow you to apply for pre-approval online. However, you can also contact them on the phone to begin the pre-approval process, where they’ll ask you for financial information and documentation to give you a loan estimate.

When you’re ready to begin house hunting, you can get pre-approved for a mortgage with Griffin Funding by contacting us today to speak with our loan experts.

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

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.

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, VA, USDA, and conventional loans. However, you may also find Non-QM loans like bank statement or asset-based loans, depending on the lender’s offerings.

Choosing the right loan type for you will largely depend on your financial situation and eligibility. For instance, if you plan to purchase a property in a rural area, a USDA loan with no down payment requirement might be right for you.

Meanwhile, if you’re a freelancer or self-employed business owner, you might prefer a Non-QM loan like a bank statement loan. These loans have different, less stringent underwriting requirements that allow you to prove your ability to repay the loan using bank statements rather than pay stubs or tax returns.

The most common type of home loan is a conventional loan, and it’s the one most people think of when they think of a mortgage. However, it’s not your only option. If you believe now is the right time to purchase a home, we recommend contacting a lender to learn about your options based on your financial and employment situation.

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.

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 which documentation you need to provide can help streamline the pre-approval process, so it’s usually best to contact your lender to determine which documents they’ll need ahead of time. 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. Get pre-approved today by contacting Griffin Funding or filling out an online application.

Bill Lyons

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 22 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 10 years in business.