Getting mortgage pre-approval can help you in the homebuying process, especially in a hot housing market. When you get pre-approval for a mortgage, you’ll have a letter from a lender in hand letting sellers know that your mortgage application has been reviewed and you’re tentatively approved for a certain loan amount and type. This can both show you’re a serious buyer and provide you a better sense of your budget as you begin house hunting.
We’ll cover the full mortgage pre-approval process, as well as how you can improve your chances of getting pre-approved for a home mortgage loan.
What Is Mortgage Pre-Approval?
Mortgage pre-approval comes in the form of a letter from a lender that states that you qualify for a loan of a certain loan amount and at a certain interest rate based on an evaluation of your credit and financial history. The letter is an offer, but not a commitment, to lend you a specific amount. It’s good for up to 90 days, depending on the lender.
You’ll want to shop for homes within the price range of your pre-approved mortgage. Armed with a letter of pre-approval, you can show sellers that you are a serious homebuyer with the means to purchase a home. In the eyes of the seller, pre-approval can often push you ahead of other potential buyers who have not yet been approved for a mortgage.
Once you find a house that you want to buy, you can make an offer. And if the seller accepts, it’s time to finalize your mortgage application. At this point, a loan underwriter will review your application and conduct other due diligence measures, such as having the house appraised to make sure it is valued at the price it’s selling for. If all goes well, the lender will issue a commitment letter, which officially seals the deal on your loan, and you can schedule a closing date.
Pre-Approval vs. Pre-Qualification
• Can provide leverage when you’re ready to get serious about buying
• Requires a full application, documentation and a credit check
• Tentatively approves you for a loan amount and type
• Can give you an idea of what you can afford as you start the process
• Simpler process that just looks at a few financial details you provide
• Not a guarantee that you will get approved for a mortgage
As you begin to look into getting a mortgage, you may encounter another term: pre-qualification.
Getting pre-qualified for a mortgage is not the same as being pre-approved. It’s actually a relatively simple process in which a lender looks at a few financial details — usually self-reported — such as income, assets and debt, and then estimates how much of a mortgage the lender thinks you can afford.
Pre-qualification gives you an idea of what your monthly payment might be and provides a chance to shop around with various lenders to see what types of terms and interest rates they offer. While pre-qualification is not a guarantee that you will actually qualify for a mortgage, it can still be useful as it gives you an idea of how much house you can afford.
Getting pre-approved is a more complicated process. You’ll have to fill out an application with your chosen lender, agree to a credit check and provide information about your income and assets. Again, pre-approval doesn’t mean it’s a done deal that you’ll get the loan, but it is a solid indication of your financial situation and ability to purchase a home.
Calculate Your Potential Mortgage
To help with the pre-qualification and pre-approval process, use the mortgage calculator below to see what your estimated monthly mortgage would be based on down payment, interest rate, and loan terms.
Mortgage Pre-Approval Pros and Cons
• Can give you an edge in the homebuying process
• Offers time to compare lenders and rates
• Lets you know the home loan amount you can afford
• Only lasts for a set amount of time
• Requires a hard credit inquiry, which can ding your score
• Does not guarantee you’ll get the loan
There are a number of advantages to getting pre-approval for a mortgage, especially if you’re shopping in a fast-moving market. For one, it can give you an edge in the homebuying process, as sellers will see that you are a serious buyer and have assurance that your financing won’t fall through and sink the deal.
Mortgage pre-approval also gives you more time to shop around for lenders and rates before you’re in a crunch once you’ve found the house you’d like to buy. This can help ensure you get the best deal you can. Plus, your home search might be better targeted because you’ll know how much house you can actually afford.
All that being said, there are a few things to keep in mind if you’re planning to get pre-approval for a mortgage. The letter is only good for a certain period of time, usually 90 days, so you’ll want to make sure you’re seriously ready to start shopping once you have your mortgage pre-approval in hand.
The application process for pre-approval isn’t necessarily an easy one either, as you’ll need to provide a lot of documentation and agree to a hard credit inquiry, which can drag down your credit score, though usually only by a bit.
And even though your pre-approval letter has details on your loan amount and type, it is only tentative approval — you still aren’t guaranteed to get the loan.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Upping Your Odds of Pre-Approval
There are a number of steps you can take to increase your chances of pre-approval or to increase the amount your lender may approve you for.
Build Your Credit
When you apply for any type of loan, lenders want to see that you have a history of properly managing your debt before offering you credit themselves.
You can build your credit history by opening and using a credit card and paying your bills on time. Or you could consider having regular payments, such as your rent, tracked and added to your credit score.
Recommended: What Credit Score Is Needed to Buy a House?
Check Your Credit
If you’ve established a credit history, a first step before applying for a mortgage is to check your credit reports, which are a history of your credit compiled from sources like banks, credit card companies, collection agencies and the government.
The information is collected by the three main credit reporting bureaus: Transunion, Equifax and Experian. You’ll want to make sure that the information on your credit reports is correct. Ordering the reports is free through AnnualCreditReport.com.
If you find any mistakes in your credit report, contact the credit reporting agencies immediately to let them know. You don’t want any incorrect information weighing down your credit score, putting your chances for pre-approval at risk.
The free credit reports provided by the nationwide credit reporting agencies do not include your credit score, a number typically between 300 and 850. You can purchase your score directly from the credit reporting agencies, or from FICO®. Your credit card company also may provide your credit score for free, or you could try an app that updates your credit score weekly and tracks your spending at no cost.
Stay on Top of Debt
Your ability to pay your bills on time has a big impact on your credit score. And if your budget allows, you should aim to make payments in full.
If you have any debts that are dragging down your credit score — for example, debts that are in collection — it’s smart to work on paying them off first, as this can give your score a more immediate boost.
Recommended: How Much Debt Is Too Much to Buy a Home?
Watch Your Debt-to-Income Ratio
Your debt-to-income ratio is your monthly debt payments divided by your monthly gross income. If you have $1,000 a month in debt payments and make $5,000 a month, your debt-to-income (DTI) ratio is $1,000 divided by $5,000, or 20%.
Mortgage lenders typically like to see a DTI ratio of 36% or less. This is because lenders may assume that borrowers with a high DTI ratio will have a harder time making their mortgage payments.
If you’re seeking pre-approval for a mortgage, it may be beneficial to keep the ratio in check by avoiding large purchases. For example, you may want to hold off on buying a new car until you’ve been pre-approved.
Prove Consistent Income
Your lender will want to know that you have enough money coming in each month to cover a potential mortgage payment, so the lender will likely want proof of consistent income for at least two years (that means pay stubs, W-2s, etc.).
For some potential borrowers, such as freelancers, this may be a tricky process since they may have income from various sources. Keep all pay stubs, tax returns and other proof of income and be prepared to show those to your lender.
What Happens If Your Mortgage Pre-Approval is Rejected?
Rejection hurts. But if you aren’t pre-approved, or you aren’t approved for a large enough mortgage to buy the house you want, you also aren’t powerless. You can ask the lender why it said “no.” This will give you an idea about what you might need to work on in order to secure the mortgage you want.
Then you may want to work on the factors that your lender saw as a sticking point to pre-approval. You can continue to work to boost your credit score, lower your DTI ratio or save for a higher down payment.
If you’re able to pay more upfront, you will typically lower your monthly mortgage payments. Once you’ve worked to make yourself a better candidate for a mortgage, you can apply for pre-approval again.
Recommended: Guide to Buying, Selling and Updating Your Home
In a competitive market, having a mortgage pre-approval letter in hand may give a house hunter an edge. After all, the letter states that the would-be buyer tentatively qualifies for a home loan of a certain amount.
If you’re shopping for a mortgage, consider giving SoFi a look. SoFi mortgage loans come with competitive rates and require as little as 5% down.
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