How Does Mortgage Pre-Approval Work?

© 2009, Brandon Cornett. All rights reserved.

Reader Question: “We were told by a real estate agent that we should get pre-approved for a mortgage loan. But we don’t really understand the process. How does mortgage pre-approval work?”

Your agent has given you some good advice. Getting pre-approved for a loan before you start house hunting is always a good idea, and for several reasons. Here the top three benefits:

• For one thing, it will help you limit your search to homes that are within your price range.
• The pre-approval process will also identify any qualifying obstacles you have, such as carrying too much debt or having bad credit. After all, it doesn’t make sense looking for a home if you can’t even get a mortgage loan. Pre-approval screening can help you spot these problems early on, so you can work on fixing them.
• Another benefit of mortgage pre-approval is that sellers will take you more seriously. When you make an offer on a home, one of the first questions the sellers (and their agents) will ask is: “Have the buyers been pre-approved for a loan?”

Those are the benefits of the pre-approval process. But you wanted to know how it works, so let’s talk about that. It’s a pretty straightforward process, really. All you have to do is contact a lender and tell them you want to get pre-approved for a mortgage loan. You can do this over the phone, or you can do it through the lender’s website. Most banks have an online pre-approval tool on their websites, and it’s a great way to get the ball rolling.

Pre-Approval by the Numbers

Home buyers should prepare for the pre-approval process early on, before they even start talking to lenders. Here are the steps I recommend taking:

1. First, make sure you’re ready to take on a mortgage payment. If you haven’t done so already, determine how much you can afford to spend on a monthly payment. It’s important to do this before you get pre-approved for a mortgage, because you might get approved for amount that exceeds your budget.
2. Start gathering your financial documents. You’ll probably have to submit W-2 tax statements for the last couple of years, income verification such as pay stubs, bank balances for the last six months, and other financial info. The lender should give you a list of documents you need to bring for the mortgage pre-approval process.
3. Once you have a budget and a monthly spending limit in mind, you can start contacting lenders. If you’re a credit union member, you might want to start there. If you have a relationship with another bank (perhaps for a car loan), you might want to talk to them about pre-approval. You can also use the Internet to get online quotes from lenders.
4. The lender will review your financial documents, check your credit score, etc. Eventually, they will tell you two things: (A) whether or not they can give you a loan, and (B) the maximum amount they’re willing to lend you.
5. The lender should also give you a pre-approval letter that includes this information. This letter can be helpful when negotiating with sellers, because it makes them more confident in your ability to pay for the home. This is helpful in a competitive market, where sellers get competing offers from buyers.

Here are some other things you should know about this process. Your pre-approval will probably have a time limit. In most cases, it will be “good” for 30 - 60 days. With that being said, the pre-approval is not set in stone — not by any means. Your pre-approval letter does not guarantee that you’ll get a loan for that amount. It’s just a way for the bank to say how much they’ll probably lend you, when the time comes. That’s why it’s called a “pre” approval … you will still need to get a final approval once you find a house, make an offer, etc.

I hope this helps you understand how the mortgage loan pre-approval process works, and I wish you well in your real estate pursuits. If you have any questions about this topic, or any other topic related to home buying, you can ask us here.