What is mortgage pre-approval?
Getting a pre-approval is an important step in the homebuying process. It will show you how much house you can afford and signal to sellers that you’re a serious buyer.
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Jamie Johnson is a Kansas City-based personal finance and credit expert whose work has been featured in Credit Karma, Insider, Bankrate, Rocket Mortgage, the U.S. Chamber of Commerce, Quicken Loans, and The Balance.
Updated June 7, 2024, 12:37 PM EDT
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Getting pre-approved is a key part of taking out a mortgage. When you get pre-approved, your lender gives you a letter stating how much it could conditionally loan you. Pre-approval can strengthen your offer with sellers by demonstrating that you’re a serious buyer.
A mortgage pre-approval also tells you how much house you can afford, which can guide your home-buying journey. A study from the National Association of REALTORS® found that home sale prices rose 5% compared to last year. Make sure you know the price range of homes in the neighborhood where you’re shopping before you start shopping. If you know what you can afford before you begin looking at houses, you’ll be better prepared when it’s time to make an offer.
What is mortgage pre-approval?
When you get pre-approved for a mortgage, your lender gives you a letter stating how much you’ve been conditionally approved to borrow. At the time of pre-approval, you may not have even started looking at potential houses — you’re just finding out what kind of mortgage you can afford.
Getting pre-approved is an important first step because it shows you what kind of price range you can afford, and some sellers won’t accept an offer on their home without a pre-approval letter.
What does a pre-approval letter say?
The pre-approval letter states that the lender is willing to loan you up to a set amount for a mortgage, assuming certain conditions are met. The document is only valid for a specific period of time — pre-approval letters are typically good for 60 to 90 days, depending on your lender.
A pre-approval letter also states the type of loan you’re taking out. It will outline the terms of the mortgage, like the potential interest rate, repayment period, and estimated monthly payments.
How to get pre-approved for a mortgage
You’ll want to get your finances in order and know what you can afford before you get pre-approved for a mortgage. Since your lender will be looking at your financial situation, try to improve what you can before you apply. Here are the steps you’ll take to get pre-approved for a mortgage:
Budget for a down payment: Before you start the pre-approval process, you need to figure out how much you can spend on a down payment. Most lenders require at least a 3% down payment for a conventional loan, but you’ll qualify for the best rates if you can put down between 10% and 20% of your target home price.
Check your credit: Your lender will use your credit information to decide whether to pre-approve you for a mortgage. It’s a good idea to check your credit report first to correct any mistakes. If your score is low, try to improve it before you apply for pre-approval. Making payments on time and lowering your credit utilization can help over time.
Pay off debt: It’s also a good idea to pay down any outstanding debt, especially high-interest credit card debt. This will lower your debt-to-income ratio (DTI) and can help you qualify for a more expensive home.
Gather important documents: Next, gather the documentation your lender will need. This includes your state-issued ID, pay stubs, federal tax returns, and bank account statements.
Comparison shop with multiple lenders: Don’t rely on the first pre-approval letter you receive — apply for pre-approval from at least three different lenders. Getting multiple offers gives you more options, and will help you find the best rates and terms on your loan. Make sure you compare not only interest rates but also terms and fees from each lender.
Shop for homes: With your pre-approval letter in hand, you can begin shopping for homes. Once you find the house you want to buy, you can submit your offer.
Submit an application: After your offer is accepted, you can submit your mortgage application. Many lenders offer a way to do this online. When the lender reviews your application — a process known as underwriting — it reviews a lot of the same financial information you provided during pre-approval. However, underwriting is more rigorous and can take a few weeks to complete.
Pre-approval vs. prequalification
Pre-approval and prequalification are similar in many ways — and some lenders might use either term — but they aren’t the same thing. In both cases, your lender gives you an estimate of how much it’s willing to lend you, but the processes for each and the weight they carry are different.
Pre-approval
- Lender examines your credit report and financial documents, also known as a hard inquiry; this will lower your credit score by a few points
- Pre-approval letter shows the potential amount the lender might approve you to borrow, as well as terms and possible rate
- Best to get pre-approved just before you start looking at homes
- You can show a pre-approval letter to sellers when you’re ready to make an offer so they can see you have financing lined up
Prequalification
- Lender relies largely on information you provide, known as a soft inquiry; this won’t affect your credit score
- Prequalification gives you a general idea of how much you could borrow
- Best to get prequalified earlier, so you have an idea of your budget
- Prequalification doesn’t carry as much weight, and is largely for your own benefit as you set your budget and decide which lenders you want to work with
When you get prequalified, you give your mortgage lender an estimate of your finances, income, and debt. The lender doesn’t pull your credit score or verify any of the financial information you’ve given them, so a prequalification letter carries very little weight when you make an offer on a home.
In comparison, when you get pre-approved, you go through the same process as applying for a mortgage. Your lender checks your credit, reviews your finances, and gets a much more comprehensive view of your financial information.
Factors that affect pre-approval
During pre-approval, your lender will review your financial situation to determine whether to pre-approve you and for how much. The lender will examine how you’ve handled debt in the past, your current debt, and how much you earn. Here’s a closer look at some of the main factors your lender will consider during the pre-approval process:
Employment and income: When you apply for a mortgage, lenders want to see that you have a stable job and can afford to make your monthly mortgage payments. That’s why most lenders will request at least two years of W-2s or tax returns.
Assets and liabilities: Your lender will also look at your current assets and liabilities since this helps them determine your total net worth.
DTI ratio: Your DTI is your total monthly debt payments divided by your gross monthly income. Most lenders look for a DTI ratio of 43% or less.
LTV ratio: Your loan-to-value (LTV) ratio compares your mortgage to the appraised value of the home. The higher the down payment you make, the lower your LTV ratio will be.
Credit score and history: Your lender will check your credit score and pull your credit reports from the three major credit bureaus. They’ll look at your payment history and how many lines of credit you’ve taken out. This information helps them determine whether you’re a good candidate for a mortgage.
Tip:
Try not to apply for additional loans, such as credit cards, during the mortgage process. Just applying for a credit card can lower your credit score* by a few points, even if you don’t use it.
FAQ
What are the benefits of getting pre-approved?
Getting pre-approved helps you understand how much house you can afford. This information will help as you begin looking at potential homes. It can also help you determine whether you should try to buy a house right now.
Sellers will also take your offer more seriously if you’ve already been pre-approved for a mortgage. In a competitive market, sellers likely won’t accept an offer if you haven’t been pre-approved.
How long does mortgage pre-approval last?
How long your pre-approval letter lasts will depend on your lender, but in most cases, a pre-approval letter expires within 60 to 90 days. The expiration date is usually listed on the letter. You can apply to renew your pre-approval, but your lender will have to verify your financial information again.
How long does it take to get pre-approved for a mortgage?
It takes an average of seven to 10 days to get pre-approved for a mortgage, though it depends on the lender. You can speed up the pre-approval process by having your financial documents ready to give to your lender.