What Is Mortgage Pre-approval? Why Does It Matter?

A mortgage pre-approval is a letter from a mortgage lender indicating how much loan you qualify to borrow. It is issued after the lender has evaluated your financial history, which includes pulling your credit report and score.

With a pre-approval letter, you can find a home you can afford by shopping within your budget. This letter shows that you’re a serious buyer to sellers and their real estate agents.

A mortgage pre-approval letter can put way above other buyers who may be interested in the same home as you and don’t have their pre-approval yet. Getting pre-approved will help you find a mortgage lender who can work with you to find a home loan with an interest rate and other terms suitable for your needs and desires.

Difference Between Pre-qualification and Pre-approval?

With a mortgage pre-qualification, a lender can give you an estimate of how much mortgage you’ll probably qualify for and some preliminary loan terms.

Estimate your credit score and provide a few details, including the purchase price of a home you would like to buy, your down payment, your monthly debts, and how you would want to structure your loan. For example, you need to know the total loan amount, the length for payments, down payment amount, fixed or adjustable rate interest.

With a mortgage pre-approval, you complete a full application, the lender pulls your credit report plus score and puts an offer in writing to give you a loan at a given interest rate.

Even with a mortgage pre-approval, your loan still has to go through underwriting which is the final stage of due diligence before issuing the loan. This happens after you have a home under contract.

What Documents Will Be Needed for Mortgage Pre-approval?

You’ll need to provide some information when applying for pre-approval which demonstrates your financial history and reliability to pay back the money borrowed.

This may include:

• Personal information such as your driver’s license, Social Security number, marital status, contact information and address
• Recent statements from your bank accounts and any investment accounts (lender tells you how far back to go)
• Employment information, including where you have worked and for how long, as well as recent paycheck stubs and W-2 income tax forms for the last two years
• Your total monthly expenses, which includes bills you pay regularly
• Your overall financial condition, which includes all of your assets (stocks, 401(k), IRAs, bonds, cash) and all of your liabilities (any debts such as credit card debt, student loans, car loans)
• Profit and loss statements if you are self-employed
• Rental property income
• Canceled checks for rent or current mortgage loan, which shows your payment history
• Gift letters, if you are using a gift from a relative to help cover the down payment

To make this process easier on you, create a folder in Google Drive or Dropbox and upload all documents into one place. If you wind up ultimately choosing a different lender than the one you used for your pre-approval, you’ll be able to share documents with just a few clicks.

While a pre-approval letter is proof that a mortgage lender is willing to make you loan, it is not an official commitment until you complete the full due diligence and application process.

Other things during the closing process can cause some challenges, including a low appraisal of the home’s value and your ability to make a sufficient down payment.

What a Mortgage Pre-approval Letter Says

A typical pre-approval letter will contain your current credit history, income, assets and debt. All this assumes that there are no changes in your financial situation while shopping for a property.

This pre-approval letter should not be considered a commitment to lend until the following conditions are met:

1. A valid sales contract is initiated on a specific property.
2. A satisfactory appraisal is completed on such property.
3. You select a mortgage program, which allows your mortgage payment to fall within the preapproved amount.
4. And a rate commitment is issued by a company.
5. The letter will often state an approximate purchase price that you qualify for and usually an expiration date, often within 90 days.

Now Can We Shop?

OK, let’s say you’ve received that precious piece of paper. You’re anxious to get started, practically packed and moving to your next address.

A couple of quick reminders:

• As we’ve noted earlier, even a pre-approval letter is not a guarantee. In fact, a lender’s underwriting department can’t issue a firm loan offer until a specific property has been identified.
• Lenders want to have some wiggle room in case your financial situation changes between the time you obtain the letter and when you actually find a home and complete the loan approval process.

That means it’s important to:

• Keep your finances operating smoothly in the interval time period.
• Avoid opening any new credit accounts for furniture or anything else, for instance a car.
• Keep existing lines of credit paid up and without any balance increases.

Having a pre-approval letter in hand is often required in order to write a contract with your offer for a home.

Why Should I Shop Multiple Lenders?

We suggest that you talk with a few mortgage lenders before committing to a loan. By applying to say three lenders rather than just one, you can compare all costs and get the best deal.

Money Down with a Loan

Some loans are 100% financed with no down payment and others for as little as 3% down in cash. Other loans are 20% down in cash with 80% financed. Different types of loans have different interest rates. Our lenders can tailor the best financing for your needs.

FREE Consultation

We do this to help you find the right home, taking the least amount of your time as possible with the loan process. We can recommend some mortgage brokers to you and then you choose which one to assist you.

Text or call to get started today at 561-339-1779. If you prefer, email us below.