Finding the right home is an essential piece of the home buying process, but it’s not the first step a buyer should take. Would you be surprised to find out your first move as a buyer should be to secure a home mortgage pre-approval letter?

If that sounds backward to you, consider what a pre-approval can do for you!

First, getting pre-approved helps you understand how much house you can afford. Second, most sellers (and realtors) don’t take buyers without a pre-approval mortgage letter seriously. Third, when you begin the mortgage process, being pre-approved can get you and your lender through everything faster and smoother.

Curious about how the pre-approval process works? Read today’s post and find out everything you want to know.

What Exactly Is a Home Mortgage Pre-Approval?

Most buyers today, go through the pre-approval process before looking at available homes in-person. While a mortgage pre-approval doesn’t guarantee any buyer to get a home loan, it does show good faith.

Pre-approval means you’ve started working with a lender.

Before issuing a pre-approval letter, a loan specialist will analyze your financial situation. They’ll look at your income, debt, credit history, and your assets. Once they’ve put the numbers together, you’ll have a clearer picture of how much money you can borrow, how much you can afford for a monthly payment, and your interest rate.

After the lender pre-approves you for a home loan, you’ll receive a letter. The pre-approval letter shows sellers you’re taking the homebuying process seriously. It also shows the willingness of a lender to work with you.

Sellers love a pre-approved buyer, and so do real estate agents.

The Difference Between Pre-Approval and Pre-Qualification

Once you start thinking about a new home, you’ll hear a variety of terms associated with home loans. In addition to pre-approval, you may come across the phrase, pre-qualification. Approved and qualified may seem like they have similar meanings, but they’re not interchangeable.

When you work with a lender on pre-qualifying you for a mortgage, you supply the numbers for your income, debts, and assets. The lender then tells you how much of a mortgage you may qualify for, but they don’t too deep into your finances. Think of a pre-qualification as a rough estimate.

For the pre-qualification, the lender bases their estimate on your verbal information. Some lenders also pull a credit history for a pre-qualification.

A pre-approval for a mortgage consists of an in-depth inquiry into your financial situation.

To give you a pre-approval letter, your lender will require proof of your income and assets as well as an official credit report. Lenders thoroughly assess a prospective borrower’s financial situation before signing off on a mortgage pre-approval.

Be Prepared with the Right Documents

As part of the pre-approval process, you’ll fill out a mortgage application. The lender will require several documents including, but not limited to, the following:

  • Driver’s License or United States Passport
  • Social Security Card
  • Pay Stubs and W-2s
  • Tax Returns
  • Bank Statements for Personal and Business Accounts
  • Statements for Asset Accounts
  • Letters of Explanation for Credit Issues

Be prepared to collect two years’ worth of income information. If you’re self-employed or you work on commission, you’ll usually need two years’ worth of tax returns. The type of loan you apply for determines how many bank statements you’ll need to provide.

If you’re receiving a gift from a relative or friend to help with your downpayment, you’ll need a gift letter. The letter states that the money is a gift and you don’t need to pay it back.

How Long to Get Pre-Approved?

Do your best to gather all the documents the lender asks for and submit them together.

Typically borrowers who come with all their documents get their mortgage pre-approval on the day they meet with the lender. It’s the only way you can speed up the approval process!

Several things can slow down the process, including:

While these issues don’t necessarily preclude you from receiving a pre-approval, they can add several days to the process. In some cases, especially for buyers with complex financial situations, any of these can add a month or more.

How to Get a Pre-Approved Mortgage

In addition to ensuring you deliver the requested documents to your lender, there are a few other things you can do to ensure you get your pre-approval letter.

  • Eliminate as much debt as possible. Lenders measure your debt-to-income ratio to determine how much of a mortgage you can afford.
  • If you’re aware of blemishes on your credit report, clean up as many of them as possible before you talk with a lender.
  •  Stash at least 3-6 months of money away to cover expenses. Your lender will consider whether you have cash savings to fall back on should you lose your primary source of income.
  • Show proof that you have or will have a down payment of at least 10%.

As far as down payments go, borrowers with larger down payments enjoy certain advantages. A 20% down payment may increase your chance of getting pre-approved. Another bonus of a larger down payment is that you won’t need to pay private mortgage insurance (PMI)

Can Your Pre-Approval for a Mortgage Change?

One of the most common mistakes people make when working through the mortgage process is making significant changes. Some changes can change the status of the pre-approval for your mortgage.

Here are some helpful tips for maintaining not only your pre-approval but gaining the final approval for your home loan.

Avoid making job changes until after you close on your home. Hold off making major purchases with your credit card. Be careful about making large deposits or withdrawals from your bank account—keep documentation if you do.

Let your lender know of major changes to your financial situation. If you keep things steady, you ensure your pre-approval doesn’t change.

Ready to Start the Pre-Approval Process?

Now that you have a better understanding of how a home mortgage pre-approval works, you’ll want to contact someone who specializes in connecting borrowers with lenders. You must get into a loan program that best fits your needs.

A mortgage broker is an ideal person to help!

To get started on the road to homeownership, contact us today. We’d love to work with you on a pre-approval for the mortgage on your new home.