What Is a Mortgage Pre-approval? How Do I Get Pre-approved? (2024)

Simply put, a mortgage pre-approval provides verification that:

• Homebuyers can borrow a predetermined amount
• Their loan type
• Loan details like the verified down payment amount
• How much their payment will be

It’s essentially a full mortgage approval minus the property.

Buyers use this piece of paper to prove to home sellers and the seller’s agent that they can buy the home if their offer is accepted.

They know all this before they find the right home.

A bonus: a pre-approval can relieve anxiety for the buyer. Instead of worrying whether the lender will approve their loan, pre-approved buyers knew their maximum mortgage size already, before they made the offer.

Instead of wondering whether it’s OK to schedule movers for closing day, pre-approved buyers know their loan should close on schedule.

Highlights:

• Purpose of Pre-approval: A mortgage pre-approval verifies your borrowing capacity, loan type, and potential payment details, giving you confidence and credibility when making home offers.
• When to Get Pre-approved: If you’re serious about buying a home in the next few months, apply for pre-approval to show sellers you’re a qualified buyer.
• Pre-approval vs. Pre-qualification: Pre-approval is a more rigorous process than pre-qualification, requiring documented financial information and offering a more reliable estimate of your borrowing power.
• Impact on Credit: Pre-approvals may involve a soft or hard credit check; hard checks can slightly lower your credit score, so it’s important to ask your lender about their process.
• Pre-approval Expiry: Most pre-approvals last 90 days, but they can be renewed if you haven’t found a home by then, requiring a fresh review of your finances.

When Should You Get Pre-Approved?

If you’re serious about buying a home in the next few months, apply for pre-approval immediately.

Home sellers and their agents won’t take you seriously without a solid pre-approval in hand.

Feel free to apply with several different lenders. But to start, it’s okay to get pre-approval from just one, then shop for better deals later.

If you do not expect to buy a home soon — if you’re just curious about how much house you could afford, for example — there’s no need for pre-approval yet. A pre-qualification can answer your questions. Or you could punch some numbers into a mortgage calculator to estimate monthly payments for different home prices at different interest rates.

Once you know for sure you’re in the market to buy, apply for mortgage pre-approval.

Do Pre-Approvals Expire?

Typical pre-approvals expire after 90 days. Some last only 30 or 60 days; some up to 120 days. The pre-approval letter from the lender will say how long your pre-approval lasts.

Lenders can renew a pre-approval if you don’t find the right home before the pre-approval expires. Renewing the pre-approval will resemble applying for one: You’ll need to show proof of income and monthly expenses, and the lender will look at your credit history again.

Does Getting Pre-Approved Hurt My Credit?

Getting pre-approved doesn’t have to pull down your credit score. Many lenders can pull a soft check of your credit. Soft checks let lenders glimpse your credit data without leaving a mark on your credit history.

However, some lenders do require a hard credit check, which could potentially lower your credit score by five points. If you’re concerned about your score, ask the lender what kind of credit check it requires for pre-approval.

As closing day approaches, and it’s time to turn the pre-approval into a full mortgage approval, the lender will need a hard inquiry.

Home Loan Pre-Approval vs. Pre-Qualification

Many people use the terms interchangeably, but there is a difference between pre-approval and pre-qualification:

• Pre-qualification: Lenders estimate mortgage approval status based on financial information provided by the applicant
• Pre-approval: Lenders estimate approval status based, mostly, on financial data they can document

When you’re honest about your income and expenses, a pre-qualification should show an accurate estimate of your borrowing power and the monthly payments you’d make on such a loan — assuming your income and expenses can be documented later.

But pre-approval takes pre-qualification a step further. Pre-approval should translate more quickly into full mortgage approval, assuming nothing major changes in the borrower’s credit and income after pre-approval and that the home itself holds up to scrutiny.

A pre-approval is best, for instance, for self-employed individuals or those with irregular income. It can be hard to estimate how the lender will calculate your income.

Pre-Approval Is For The Home Buyer, Not The Home

Mortgage pre-approval gives the home shopper preliminary approval, but this approval does not grant permission to buy any home. The home you’re buying will have to be checked out with the lender through a separate process.

To qualify for a mortgage, a home must:

• Be worth its price: The lender will schedule a home appraisal to find the fair market value of the home you’re planning to buy. The home’s purchase price can’t exceed its appraised value. If the price you’ve agreed to pay is higher than the value of the home, you may need to make a larger down payment — or ask the seller to drop the price.
• Qualify for the loan program: Different loan programs have different rules. USDA loans finance homes only when they’re located in USDA-designated rural areas; FHA and VA loans have higher occupancy standards than conventional loans. Homes that are incomplete or heavily damaged might not qualify for any type of mortgage.

But rest assured: Most homes that are weatherproof, accessible to utilities and public roads, and priced fairly will be eligible for most types of loans.

How Do I Get Pre-Approved?

Pre-approval requires some work:

Step 1: Check Your Own Credit

Before seeking pre-approval, check your credit score. Your FICO score opens or closes the door to mortgage lending. If your credit score is too low to qualify, why spend time seeking pre-approval only to be told it is too low?

To check your FICO score, log into an existing credit card account. Many of these will show your FICO. If this doesn’t work, you’ll need another way to check your score. Be sure to check your FICO since that’s what lenders will check. Other scores, like VantageScore, may be different.

Most conventional lenders require a FICO score of 620 or higher; FHA lenders can approve buyers with FICOs of 580 — and sometimes even lower than 580 if the buyer can put 10 percent down.

Step 2: Find Your Documents

During the pre-approval process, the lender will ask for various documents. Gathering these files in advance will save lots of time. Documents include, but might not be limited to:

• W2 forms or copies of your income tax returns for the past two years
• Bank statements — at least the two most recent ones
• Addresses where you’ve lived for at least two years
• Employers names and contact information for the past two years

If you earn income from self-employment, retirement funds, investment properties, divorce settlements, child support, or any other source, be prepared to prove that income, too.

Step 3: Complete The Application

Now that you’ve tracked down the documents, filling out the application should be a lot easier.

Many lenders complete pre-approval applications fully online. Others might require a visit to a local office. Some use a hybrid approach: Filling out forms and uploading documents online but discussing the application in person or over the phone.

In any case, answer every question honestly. For example, don’t overestimate the size of your down payment contribution. Be sure to leave room in your savings for closing costs. The accuracy of your pre-approval — and the value of the knowledge it offers — depends, a lot, on the quality of the data you enter.

How Will The Lender Decide Whether I’m Pre-Approved?

The pre-approval application sketches a picture of the applicant’s financial life.

This picture shows how much the borrower could afford to pay each month and whether the borrower will be likely to continue making payments. The lender can then match the borrower to a maximum pre-approved loan size.

This maximum loan size translates to the borrower’s homebuying power.

What’s Included In The Pre-Approval Picture?

Lenders want the picture to show someone who can comfortably afford the new mortgage payment. How can they tell?

Debt-To-Income Ratio (DTI)

Will the borrower be adding their new mortgage payment to an already overwhelming pile of monthly debt? To find out, the lender adds up the applicant’s monthly payments — for car loans, student loans, personal loans, credit card minimum payments, and the new mortgage payment — and compares that total to the borrower’s documented income.

This shows the borrower’s debt-to-income ratio or DTI. To find your DTI:

1. Add up monthly debts (but not utilities, food, or other living expenses). Include your new mortgage payment
2. Divide this number by your monthly gross income
3. Multiply the answer by 100

Someone who owes $2,400 in monthly debt and earns $6,000 a month has a DTI of 40 percent.

So, what’s a good DTI? Lower numbers: Below 36 percent is a great place to be, especially for conventional loans. FHA lenders can accept DTIs in the high 30s to mid-40s. Some can even consider applicants with DTIs of 50 percent if other parts of the application compensate for this weakness.

Income Stability

Where is the borrower’s income coming from? Is this a stable source of income? Or will the homebuyer lose a chunk of income, throwing their entire financial life into turmoil a couple months into the loan?

No lender knows the future, so they depend on the recent past as a guide. Borrowers who have held the same job for the past two years are solid bets to stay employed for the foreseeable future. If you’ve switched jobs but stayed in the same profession, the lender should be OK with that, too. If you’ve tried out three different professions in the past year, you may need to wait a year or so for pre-approval.

For income from investments, alimony, or disability, the lender will need proof that the payments are scheduled to continue for at least three years.

Cash Reserves

Home buyers with healthy savings account balances can afford bigger down payments — and they’re in better shape to weather a financial storm. If they lose their job next year, for example, they could use savings to keep the house payment current while they search for another job.

Lenders will check bank statements and proof of other assets to see the borrower’s stability.

Source Of Down Payment

Not every buyer has tens of thousands of dollars in cash for a down payment. Some buyers with little savings can get help from local down payment assistance programs. Other buyers can use gifts from family members and friends.

However, the mortgage lender needs to know where this money is coming from. If it’s from a gift, the lender will require a letter from the donor, ensuring the donor does not expect to be repaid or to claim partial home ownership. If the money comes from a down payment assistance program, the program may limit which lenders the borrower can use.

Credit Score

Debt-to-income ratios and bank account balances show the borrower’s ability to repay the loan. Credit scores reflect the borrower’s willingness to stay on track with the loan.

Higher credit scores — think 720 or higher — make borrowing easier. But scores as low as 620 still qualify for many loan options. For borrowers with scores below 620, an FHA loan can still help make homeownership possible.

All Of These Factors Combined

None of the factors above exist in a vacuum. They’re interdependent.

This means borrowers with weak profiles may be able to compensate by showing strength in other aspects of their file. A borrower can compensate for a higher DTI, for example, by showing they have three years’ worth of living expenses set aside in savings. Likewise, someone with a shakier credit score can ease the lender’s concerns by making a larger down payment.

What If I Get Turned Down For Pre-Approval?

Even a pre-approval denial provides knowledge — the knowledge that you’re not quite ready financially to buy.

Most pre-approval denials happen for one or both of these two reasons:

• High debt-to-income ratio (DTI)
• Low credit score

What can you do?

Improve DTI And Credit Score

Some good news: You could improve your DTI and credit score at the same time. For example, paying down debt can lower your DTI as it increases your credit score — especially when you leave paid-off accounts open and unused.

Or, since DTI factors in debt and income, earning more income should improve DTI. Can you ask for a raise or get a job in the same field that pays more?

Another Option: Add a Co-Signer

Getting someone to cosign on your next application adds the co-signer’s income and debt into the equation. If a parent, spouse, or close friend earns plenty of income and owes little debt, this person would likely bolster your borrowing power.

It’s a big ask. If you start missing payments, your co-signer will become responsible for your mortgage loan. Plus, your mortgage would be part of your co-signer’s DTI and credit history, meaning your home could limit their own borrowing power later.

Of course, you could refinance later, once you earn more and owe less, to free your co-signer of this burden.

Check Your Loan Type

FHA loans, because the Federal Housing Administration insures them, can approve buyers with lower credit scores and higher DTIs. If the lender denied your pre-approval for a conventional loan, the lender may be able to say “yes” to an FHA loan.

Other government-sponsored loan programs could help, too. VA loans require no down payment, for example. This puts veterans and active duty military members in a better position for mortgage qualifying. USDA loans also require no money down, but only for buyers in rural areas, as defined by the USDA.

Comparing Pre-Approvals Saves Money

There’s also this: Different lenders look at borrowers differently. Getting turned down by one lender does not automatically mean every other lender will say no to pre-approval. This is true, especially for applicants who barely missed getting pre-approval from the first lender.

And even when you do get pre-approved by the first lender you try, don’t jump at the offer. You could still get a better deal elsewhere. Getting a couple more loan offers could open the door to thousands of dollars in savings for years into the future.

Compare today’s mortgage rates here.