Looking through online listings and eating cookies at open houses is the fun part of home shopping. However, going through the logistics of it all — such as applying for a mortgage — can be less fun and often stressful.
One way to make the home-buying process less of a headache is knowing what to expect at each stage. The first step to getting a mortgage is often the pre-approval process. So what’s a mortgage pre-approval, and how does it work? Here’s what you need to know.
What is a mortgage pre-approval?
A mortgage pre-approval is a written conditional loan commitment given to a borrower by a lender after it reviews an application. To get pre-approved, you typically need to provide basic information about yourself, such as your income, assets, and where you’re employed. The lender might also ask you to provide pay stubs, W-2s, and other financial documents before you’re eligible for a pre-approval letter. It might also perform a credit check.
A pre-approval letter outlines the maximum loan amount you can borrow, and the offer may expire after several months. Keep in mind that a mortgage pre-approval is not a guarantee of approval. Before final approval, your loan has to go through the underwriting process, where an underwriter further verifies documents and loan eligibility before giving the all-clear.
However, getting pre-approved can still be worthwhile. Having a pre-approval in hand during your home search could put your offer ahead of other homebuyers who don’t have one. It might show the seller you’re a serious buyer and that a lender will lend you money for a house. It might also give you a better sense of which homes are in your price range as you're shopping for a property.
Mortgage pre-approval vs. pre-qualification
Sometimes the terms pre-approval and pre-qualification are used interchangeably, but there can be differences between the two. A mortgage pre-approval tends to be a more involved process; the lender asks for financial documents and reviews them closely.
On the other hand, the purpose of the pre-qualification is to give you a general sense of what you might qualify for. A lender might pre-qualify you after asking questions about your finances over the phone or through an online form without verifying documents. A mortgage pre-approval might take more than a week to process; meanwhile, you could potentially get pre-qualified much faster.
Applying for a mortgage isn’t the only time you might see a pre-approval letter. For example, credit card companies often send out pre-approved credit card offers to people who meet certain criteria. Pre-screenings such as this typically trigger a soft inquiry, which shouldn’t appear on your credit report or affect your score. If you’re shopping for a new credit card, you could use pre-approval letters to compare interest rates, terms, and fees across multiple offers before choosing the right card for your wallet.
Unlike what you might get from credit card issuers, you’ll typically want to get pre-approved from only one mortgage lender after you’ve done some shopping around to find loan terms and rates that meet your needs because a pre-approval might result in a hard inquiry on your credit report.
How to get pre-approved for a mortgage
To get pre-approved for a mortgage, you need to first gather some paperwork for the application process. Here are some documents you might need:
- Paystub copies
- Tax returns
- Bank statements
- Bank account numbers
- W-2 forms
The next step is filling out a pre-approval application with the lender. The lender may ask you to provide proof of assets, employment, and identification, and you might also need to provide authorization for a credit inquiry to assess your creditworthiness. If you are pre-approved for a home loan, you’ll get a letter stating how much you’re conditionally approved for once your application is processed.
Here are a few quick facts you should know about mortgage pre-approvals:
Is it better to get pre-approved or pre-qualified?
Whether it’s better to get pre-qualified or pre-approved depends on your financial situation and where you’re at in your home-buying journey. If you’re a first-time homebuyer curious about how much you might qualify for, a pre-qualification could be a good first step that gives you an estimate of how much you could borrow.
If you’re motivated to buy sooner than later, a pre-approval — even though it’s a conditional approval — might give you more concrete information because it involves document review.
A seller could also take you more seriously if you have a pre-approval when negotiating a home’s purchase because they see a lender could be willing to help you finance the home. This could come in handy in a competitive market.
Does a pre-approval mean you are approved?
No, a pre-approval is a conditional approval. Before giving you a final stamp of approval, your mortgage loan application has to go through underwriting. Underwriting is a process where an underwriter assesses your income, debt, assets, credit history, and other financial information to determine whether you’re eligible for the loan.
The pre-approval also doesn’t mean you’re committed to a lender. You can still shop around with other lenders before deciding on which one you will use for a home purchase. Remember that getting a pre-approval from or applying for a loan with another lender might result in another hard inquiry on your credit report.
Does a pre-approval or pre-qualification impact your credit score?
Both a pre-qualification and pre-approval could require a credit check. A lender can tell you which type of credit check will be performed.
Does it cost money to get a pre-approval letter?
A pre-approval may or may not cost money, depending on the lender. It’s also important to note that lenders may charge mortgage application fees, which can vary from one lender to the next. Application costs are one of many fees you can compare across lenders when price shopping.
What credit score do you need to get a mortgage?
The credit score you need for a mortgage varies. For example, with an FHA loan, you need a credit score of 580 or better if you want to put 3.5% down. You might be able to qualify with a credit score below 580 for an FHA loan, but you might need to put down a higher down payment of at least 10%.
Conventional loans without government backing typically require a higher credit score. Not sure which loan is right for you? Lenders should be able to walk you through the different loan options you have given your credit profile and the amount you have for a down payment.
The bottom line
How to get a loan and how the home-buying process works is something you might be trying to figure out if you’re a first-time homebuyer. Getting pre-approved for a mortgage is often the first major step toward purchasing a home.
With a pre-approval letter in hand, you have a commitment from a lender that says it may be willing to offer you a mortgage up to a certain amount. Pre-approvals can be easy to confuse with pre-qualifications.
In general, think of a pre-qualification as a preliminary homebuying step — it gives you an estimate of what you could qualify for based on a quick overview of your finances. On the other hand, the financial review for a pre-approval could be a bit more in-depth. If you’re ready to shop for a mortgage, FinanceBuzz’s roundup of the best mortgage lenders could be a good place to start.