What Is Mortgage Pre-Approval?

A mortgage pre-approval means a loan officer will examine your finances, including your assets, income, debts and even credit history, to work out how much money you can borrow, what loans you could be approved for and what interest rate you may be looking at when it comes to paying for your home.

However, unlike the name suggests, mortgage pre-approval does not mean you will automatically secure a loan for any home you want. Rather, it refers to the process of figuring out how much money you can borrow to purchase a home.

Why do you need mortgage pre-approval?

Mortgage pre-approvals increase your odds of securing a mortgage, and as the real-estate market has become increasingly competitive over the last 6 months, it has become increasingly important to begin your search with a pre-approval.

Getting pre-approved for a mortgage can also:

Help establish credibility with sellers and show you have the finances needed to buy their house.
Provide you with a better idea of your home budget.
Help with your closing, as pre-approval can help accelerate the processing of your loan after you make an offer because the lender has all your information.

What documents and information are needed for a mortgage pre-approval?

Obtaining mortgage pre-approval is not a straightforward process. It can be incredibly burdensome due to the amount of documentation that must be presented to the lender.
Take, for example, some of the more common documents and information you’ll need to submit to a lender to receive a pre-approval:

Personal information

Social security number
Driver's license number or passport information.
Green card information, if applicable
Credit history
Employment verification, where the lender discusses your salary with your employer

Income documentation

Paystubs, usually covering the last 30 days
W-2 forms, typically covering the previous two years
Documentation of any other income
Personal federal income tax returns for the last two years
Business federal income tax returns for the last two years

When should you seek pre-approval?

In general, you should seek to obtain pre-approval before looking for a home. Doing so can help you with the home buying process and even speed up your search for the home of your dreams, primarily because pre-approval helps you understand what kind of house you can afford.

As a bonus, a pre-approval letter can also put you ahead of other potential buyers who have yet to secure pre-approval, as the seller will likely consider your offer more seriously.

Is a prequalification the same as a pre-approval?

While the terms ‘prequalification’ and ‘pre-approval’ may seem one and the same, there are some major differences between them.

A prequalification is usually not as accurate as a pre-approval, as you do not have to provide as much information about your finances to obtain a prequalification, and lenders typically do not pull your credit information. Instead, to secure a prequalification, you may only need to provide information on your income, assets and debt.

However, lenders do not usually look into or question the information you provide. As a result, the figures you provide may not be accurate, and, consequently, the prequalification will only give you an imperfect estimate of what you can afford.

In comparison, a pre-approval is a solid and thorough examination of your finances that involves a deep dive into your credit history, debts and assets and requires documentation and reports as evidence. Only once everything checks out will a lender offer you a pre-approval.

How long will it take for you to obtain pre-approval?

Once you have submitted your documents and information to the lender, you could obtain pre-approval on the same day or within three business days.

However, if you have a significant history of debt, foreclosures or a low credit score, the pre-approval process can take longer, from a few days to as long as several months for some individuals. Providing the lender with all the documents needed can help speed up the process, even with some issues in your credit history.

Does a pre-approval expire?

Most mortgage pre-approvals are only good for 90 days and all of them will have an expiration date. So, if you’re still shopping for a house after the letter expires, you’ll need to ask your lender to renew your pre-approval.

However, before the lender issue the new letter, they will have to recheck your credit information and any further updated information to see whether anything has changed, such as your credit history, income or interest rate.

Does a pre-approval bind you?

A pre-approval is not a binding agreement with a lender. In fact, you are free to switch lenders before taking out a loan. However, it is important to add that if you decide to work with another lender to take out a mortgage, you will have to repeat the process of filling out and submitting the documents again.

On the other hand, if you decide to go ahead and obtain a mortgage through the lender that granted your pre-approval, the process should be relatively quick, as it will already have all your documents on file.

Does a pre-approval impact your credit score?

Fortunately, obtaining pre-approval from a lender, even multiple ones, will not significantly hurt your credit score. Although it may cause your score to dip slightly by five to ten points, or even less, it will not substantially impact your credit, and the effect is temporary. Subsequent inquiries from other lenders, usually within 45 days, will also not affect your score since FICO, for example, would consider these inquiries as one hard inquiry for credit scoring purposes because they understand that you were rate-shopping for one loan, not multiple separate ones.

Key takeaways from Money's guide to mortgage pre-approval

Securing pre-approval for a mortgage is a critical step for a buyer. Being pre-approved for a mortgage helps you verify what type of home you can afford while also allowing you to discuss your loan options and the type of budgeting options you have with a lender, so you’ll know what kind of monthly mortgage payments to expect.