How to Get Pre-Approved for a Home Loan
Pre-approval doesn’t guarantee the success of your loan application, and a small percentage of pre-approvals don’t turn into mortgage commitments, often because something is wrong with the chosen property.
However, it certainly helps you by communicating a level of credit and financial worthiness in shopping for a home. It is the key to getting the home you imagined for the price you deserve.
However, you may not know what pre-approval is or how to get your own letter.
In light of that, we created a guide to this process below. Keep reading to learn more about what it means to be pre-approved and what you need to know about this process before starting your home-buying journey.
What is a pre-approval?
In the mortgage business, pre-approval is a process in which your lender vets your finances to see how much they could potentially approve you in a loan.
Specifically, during this process, your lender looks at your income, assets, and credit score in order to determine which loans you may be a good candidate for and what your interest rate may be.
Once you have completed this process, they will issue you a letter that you can show the seller when you’re ready to submit an offer on a home. The letter essentially acts as proof that you are considered financeable by a reputable financial institution.
These days, many real estate agents and sellers won’t consider an offer complete unless it comes with a pre-approval letter attached.
Pre-qualification vs. pre-approval
A mortgage pre-qualification is simply an estimate of how much you can afford to spend on your home. In comparison, being pre-approved means your lender has checked your credit score, verified your documentation, and approved you for a specific loan amount.
Once you’ve been pre-approved, your ability to pay a mortgage is no question.
Usually, all that’s left is to find a house to call home. And, of course, getting a specific property approved by your lender.
What’s the difference between pre-qualification, pre-approval, and pre-underwriting?
In truth, there are three different ways to estimate how much you might be able to be approved for in a home loan.
However, there are some key differences between each of them. We have laid them out below for your consideration.
Getting a pre-qualification is the simplest way to understand how much you may be able to be approved for in a home loan. This process involves submitting estimates of your income, debts, and assets to a lender.
This process can usually happen very quickly, but since the figures are based on estimates, pre-qualification is considered less reliable than the other methods on this list.
Pre-approval is people’s most common method to estimate how much they could be approved for in a loan. This method involves having a letter take an initial look at your finances and run a credit check.
Based on that initial data, the lender can often estimate the maximum amount they would approve you for in a loan.
You could also consider pre-underwriting if you want to take things a step further. At its core, pre-underwriting involves getting fully approved for a loan before you even submit an offer.
Obviously, this version of approval requires the most legwork. However, it can be useful, especially in hot markets.
Consider Embrace Home Loan’s Approved to Move™ program if you’re interested in pre-underwriting.
Being Approved to Move is as close as you can to submitting a cash offer while still obtaining financing. It can make all the difference in a multiple-offer situation.
Why you should get pre-approved
If you’re interested in purchasing a home in the near future, you should obtain pre-approval.
Because before you can make an official purchase offer, your real estate agent and the seller will ask to see your pre-approval letter. This letter proves you’ll be able to make the purchase (pending any property-related complications) should your offer be accepted.
Your pre-approval letter will last anywhere from two to three months, depending on the lender. This means if you haven’t made an offer on a home in that period of time, you’ll need to get another pre-approval letter.
What You Need for Pre-Approval
There are five major items you’ll need for mortgage pre-approval, including:
- Proof of Income. After the Great Recession, lenders stopped offering no-verification or no-documentation mortgages. You’ll need to supply W-2 statements from the past two years, several recent pay stubs to prove your regular income, and proof of additional income. This might include alimony, bonuses, or an inheritance. You’ll need your two most recent tax returns to complete this requirement.
- Good Credit. It’s nearly impossible to get approved for a mortgage in this day and age without a decent credit score. Most lenders reserve the lowest interest rates for those with an impressive credit score of 740 or more. You’ll need to pay a higher interest rate or supply a larger down payment if you have a lower score. If you want an FHA loan, you’ll need a score of 580 or more with 3.5% down. Those with a score of 580 or higher could also consider alternative programs like Beyond by Embrace.
- Proof of Assets. At this time, you’ll need to print bank statements that show, in no uncertain terms, you have the money to cover the down payment and closing costs. The amount of your down payment will depend on your loan. Under an FHA loan, you need only pay 3.5% of the cost of the home. Under a conventional loan, you’ll need to supply anywhere from 5% to 20% of the total. Since your down payment can vary drastically, the pre-qualification process may give you an idea of how much to save up before pre-approval.
- Employment Verification. While pay stubs are helpful, they don’t prove you’re employed. Most lenders will be interested in calling your employer to verify you have a job and to clarify how much you earn. After the crash in 2008, lenders are wary of awarding mortgages to those without stable employment. If you’re self-employed, a significant amount of additional paperwork will be required to outline your income and business prospects.
- Additional Documentation. Finally, you’ll need a series of general documentation, including your driver’s license, social security card, and signature on a letter of approval to conduct a credit check. To keep the process straightforward, bring any documentation you feel could help prove your stability, value, and assets.
What to bring to get preapproved for a home loan
Now that you understand what a pre-approval is, the next step is to learn how to get one of your own. To that end, we’ve listed out the steps in this process for you below:
1. Gather your financial documents
Since getting pre-approval hinges on the lender being able to vet your financial situation, you will need to provide them with the financial documentation mentioned above. In particular, you will need the following documents:
- Two years of W-2s
- Your most recent pay stub (with your year-to-date income listed)
- Two years of tax returns (if you’re self-employed)
- Any recent statements for your bank accounts or other assets
- Your license or state/federal-issued photo ID
- Your social security number
2. Bring them to a lender
Once you have all these documents in hand, you can bring them to your lender. Typically, your lender will also ask for your approval to run a credit check, which will be recorded on your credit report. After, you give them that approval, you should be good to go.
3. Wait for your pre-approval letter
Next, all you have to do is wait. Every lender will have a different turnaround time for issuing pre-approval letters. Some lenders can do it in as little as a few days, while others may take a week or more.
4. Start submitting offers
Once you have a pre-approval letter in hand, it’s time to start shopping for homes. Typically, Your average pre-approval letter is good for 30 days, so you’ll want to start shopping as soon as possible.
The Stages of Your Home Loan Application
There are three basic stages in the mortgage application process: pre-qualification, pre-approval, and mortgage commitment.
In pre-qualification, you’ll go through an informal process.
A mortgage professional will ask about your assets, income, and expenses. Then, you’ll get a general idea of the price range you can afford when searching for your next home.
In reality, pre-qualification doesn’t bring you closer to securing a mortgage, but it can help you understand your position.
A lender will look at the documentation in pre-approval, including credit reports, employment history, and income. From there, you’ll explore the loan programs for which you qualify, the maximum amount you can borrow, and the interest rates you might be offered.
It’s important to note that, during the pre-approval process, your loan representative is not the person responsible for offering and approving your mortgage. That person is called an underwriter.
Mortgage Commitment Stage
Finally, in the mortgage commitment stage, your lender will issue a letter approving you and the property you wish to purchase.
You cannot reach this stage until you’ve selected a property.
Because you’ve already gone through pre-approval, the documentation requirements for the mortgage commitment stage should be less stringent. You’ll need your loan representative to submit your application and approval to an underwriter. Then, the underwriter will return with final approval, approval with conditions, suspended or denied.
Under suspension, your underwriter will request more documentation before making a decision. Again, investing time in the pre-approval process will help ensure this snag doesn’t come up during the home-buying process — a time when you’re already thinking about a dozen things at once.
The bottom line on getting pre-approved for a home loan
In today’s real estate market, getting pre-approval is basically a requirement. With that in mind, if you’re searching for a home in the near future, you will want to get a pre-approval letter of your own.
To that end, use this post as your guide to the process.
Armed with this knowledge, you should have a much better idea of what it takes to get pre-approved for a home loan.
Need more help with the pre-approval process?
If so, contact the mortgage experts at Embrace Home Loans. Our team offers a fresh approach to buying and refinancing.
Contact an experienced representative to learn more about pre-approvals, interest rates, and loan availability.