How the Mortgage Pre-Approval Process Works

If you’re looking for a home, the first thing you should do is get pre-approved for a mortgage. You could opt for a pre-qualification letter, which won’t require anyone to pull your credit, but we found that we pre-qualified for a much higher mortgage than we actually qualified for with a pre-approval. In addition, most sellers want to see a pre-approval letter before considering an offer.

What Is Mortgage Pre-Approval?

When issuing a pre-approval letter, the lender or broker reviews your salary, liquid assets, employment history, credit file, debt payments, and credit scores. They then determine the size, interest rate, and terms of the mortgage you’re likely to qualify for. A pre-qualification is done without reviewing your credit file, and therefore isn’t as accurate. Because the broker or lender is reviewing your actual credit, the pre-approval is a strong indicator that your loan will be funded. It isn’t a guarantee, but it’s a strong indicator.

What Is a Good Faith Estimate?

When requesting your letter, you should also request a Good Faith Estimate, which lists all of the fees that are likely to be included in your closing costs. Although not all of them are controlled by the lender, the estimate will help you compare origination and other lender costs when deciding which lender to use.

When to Get a Pre-Approval Letter

Most mortgage pre-approval letters are good for 60-90 days, after which time the lender will have to pull your scores again to make sure nothing drastic has changed. It’s best to get a ballpark estimate of your target price before going to open houses, but wait until you start actively shopping with a real estate agent to submit a pre-approval application.

If your letters expire before you have an offer on a house accepted, you can wait until you put in your next offer to have your letters updated. Once the initial letter is complete, the lender or broker can quickly pull your scores and update it anytime.

How Many Letters Do You Need?

The answer is it depends. We requested one from a broker and one from a bank. Our agent usually submits the one from the bank with our offers. If you’re submitting an offer for a short sale or foreclosure, the selling bank may require you to be pre-qualified through them to help them determine whether your loan is likely to close if they accept your offer.

Preparing for Pre-Approval

It’s a good idea to check your credit and order your scores a few months before applying for a pre-approval. That will give you the chance to correct any errors and hopefully boost your scores a little. After you request your letter, don’t make large purchases or take on new credit or debts. If you’re paying down debt, you should certainly continue to do that. You should also continue to increase your savings. It’s best to wait until you close the loan to accept a new job, but the bank may overlook a recent job change if it resulted in a substantial increase in income.

The Documents You’ll Need

The exact list of documents varies depending on the lender or broker, but we have needed the following at some point:

  • One month of paystubs
  • Federal tax returns for 2007 and 2008
  • Savings account statement/current balance
  • Checking account statement/current balance
  • Retirement account statement/current balance (if using for funding)
  • W-2s from 2007 and 2008
  • Name, address, and job title with current employer

If you’re self-employed, you’ll need additional documents. Keep copies of all of these in a folder so you have them ready whenever you need to request a pre-approval. You’ll also need to submit the bank statements with your offer as proof of funds, so make sure you have online access to your account.

You may remember the good old days when all you needed was a pulse and a Social Security number to buy a house. Those days are over, and that’s a good thing, but be prepared for a full-doc approval process. Get all your ducks in a row now and the pre-approval process will be quick and easy.

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