In a seller’s market, mortgage pre-approval can give you a leg up when bidding. It also helps you set reasonable expectations for your house hunt and prevent the heartbreak of finding a home you can’t afford.
Pre approval is more valuable than prequalification because the lender verifies documentation to approve a loan amount. Final loan approval occurs when the property appraisal is completed and you close on your mortgage.
What Is Pre-Approval?
Homebuyers often make the mistake of researching home options without first consulting with a mortgage lender and getting pre-approved. That mistake can lead to financial setbacks down the road and may even prevent a buyer from being able to purchase a property at all. Pre-approvals allow borrowers to understand their house-hunting budget and the monthly mortgage payment they can afford. It’s important to note that mortgage pre-approvals typically require a hard credit pull, which can temporarily drop a borrower’s credit score by a few points. The good news is that mortgage lenders bundle pre-approval requests into one inquiry on a credit report to minimize the impact on a homebuyer’s credit score.
It’s important to note that a mortgage pre-approval is not a guarantee and that actual loan approval will take place during an underwriting stage where a lender examines all aspects of a borrower’s finances. This includes verifying employment, income and assets, as well as examining a borrower’s credit history and debt-to-income ratio.
How Does Pre-Approval Work?
In the preapproval process, you fill out an application with your lender and submit supporting documents like pay stubs and bank statements. You also agree to a credit check, and the lender will perform an analysis of your debt-to-income ratio to see how much you can afford to spend on a mortgage each month.
The lender will consider your current debt, including credit cards and auto loans, in addition to your new mortgage. Generally, lenders want the monthly home loan payment to take up no more than 28 percent of your gross income and total debt payments (including the mortgage) to make up no more than 36 percent.
The lender will send you a letter that indicates the maximum loan amount you have been approved for. While a letter of pre approval is not a guarantee, it will show home sellers that you are a serious buyer and can secure financing for your new purchase. That gives you a competitive advantage during a frenzied market.
What Can I Do With Pre-Approval?
Home buyers who get pre-approval have more negotiating power when shopping for a home and can avoid the heartache of falling in love with a house only to find out later that it’s financially out of reach. It also demonstrates to sellers that the borrower is serious about buying the property.
Mortgage pre-approval is valid for a specific time period (which varies by lender), and the loan file will eventually transfer to an underwriter to determine full approval for the mortgage. The underwriter will review the borrower’s credit history, tax returns, pay stubs, savings account records and other information to verify that the borrower meets guidelines for their home loans program.
The underwriter will also verify the borrower’s income to ensure it’s sufficient to cover the new monthly mortgage payment and debt payments. If there are any changes to the financial picture, the underwriter may approve or disapprove the loan offer and require new documentation or a lower borrowing amount.
How Long Does Pre-Approval Take?
It’s often recommended that prospective buyers seek pre-approval before they even start shopping for a home, so any issues can be resolved before they set their hearts on a particular property. For example, it’s important to know how much you can afford, and a pre-approval process helps with that by assessing your creditworthiness and verifying employment and financial documentation.
In addition, a mortgage pre-approval typically involves an in-person interview with the lender. The actual loan approval takes a deeper look at your records and may take longer to obtain if you have complicated finances, like a lot of debt or previous foreclosures on your record.
Getting pre-approval can help speed up the purchase process by showing sellers that you are a serious buyer with the means to close on the home. It’s also a great way to shop lenders and learn about differences in rates, fees and timeframes for closings. You might even find that you can save money by getting pre-approval from multiple lenders.