Finding the perfect home can be an exciting adventure for new and veteran homebuyers alike. But before you start scrolling through options online, it’s important to figure out what a realistic budget is so you can shop smarter and make strong offers.
Part of this process is being pre-approved for a loan - this means determining how much money you can borrow from a financial institution (ie: a bank). Your lender asks you for a variety of information to determine what you can be approved for, how much you can realistically borrow, and what your interest rate may be.
This process is basically an application for your mortgage and an in-depth look at your finances. Here’s what you can expect to show to your lender:
Proof of Income and Employment Verification through W-2 Statements and Pay Stubs
Proof of Assets
Identification through your License and Social Security Number
Credit History through your Bank and Credit Card Statements
And more
This process isn’t just about your lender knowing how much they should expect to lend but as a buyer, you’ll have information to help you narrow down your options. That’s why going through the pre-approval process early on when you’re starting your home buying journey so your agent can help you more effectively.
After you’ve gone through the pre-approval process, you’ll receive a preapproval letter. Your real estate agent will want to see this before shortlisting options for you, to know that you are serious about your journey and that they show you options within your budget.
This letter also helps you when you find a home you love because by showing it to the seller, they’ll be reassured that you can indeed afford it and be more likely to consider your offer.
Another added benefit of going through this process earlier on is having time on your side. Different situations can come up during the home buying process that puts time constraints on the buyer and/or seller. Having this process done and dusted gets the bulk of the work done so when your offer is accepted, you can quickly move on to the closing and moving process.
But here are a few things to keep in mind about the pre-approval process.
This process results in more than just an estimate - it’s an offer by the lender to loan you a specific amount, based on their terms. This offer can also expire after a certain number of days, depending on the lender. Some potential buyers opt for a pre-qualification instead, before the pre-approval, to get an idea of if they’re financially ready to purchase a home. This process is more informal and the lender simply estimates whether or not you would qualify for a mortgage and how much you may be able to borrow.
Now let’s say you’ve gone through the pre-approval process and you know the maximum payment you can expect from the bank.
But the reality is you're not actually pre-approved for a loan amount, you are pre-approved for a maximum payment. When the lender or real estate agent is looking at your application or taking any of your other monthly debts - things like student loans, cars, credit cards - adding on the mortgage payment and then making sure that that total amount does not exceed the debt to income ratio for a particular program.
As an example, let’s say your maximum mortgage payment is $1,750 and that includes the other debts you already have. On a single-family home marketed at $350,000 with 5% down and a 3% interest rate, that should have your payment under that $1,750 mark.
However, let's say that you're looking at a condo or townhome. Most of the time, there are going to be HOA dues included and that will push up your overall cost. Let’s say that the HOA costs are around $250. If you add that onto your $1,750 payment, you're over your limit.
So if we reverse engineer your maximum payment factoring in things like HOA dues, that's probably going to have you closer to a purchase price of around $280,000. That's why there's a big swing depending on the type of property that you're looking for and then also the sales price and associated costs - including taxes, insurance, and HOA dues.
The thing to keep in mind is when you're shopping for a home is to look within your range but always stay in constant contact with your lender when you're thinking about a specific home. They’re going to want to run the payment for that home and make sure that it fits within your budget so there are no issues with final approval.
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FAQs
Mortgage pre-qualification means a lender is willing to provide you a certain amount of money to purchase a home. Pre-qualification doesn't necessarily guarantee a mortgage. It does, however, provide a maximum loan amount that you could receive.
What does it mean to be preapproved for a home loan? ›
Getting a preapproval letter isn't the same thing as applying for a loan. A preapproval letter just says that a lender is willing to lend to you – pending further confirmation of details. A preapproval helps you shop for a home, because it lets the seller know you are a serious buyer.
Can you get denied a mortgage after being pre-approved? ›
Mortgages can get denied and real estate deals can fall apart — even after the buyer is pre-approved. If you're aware of the pitfalls, you'll reduce the chance it can happen to you!
Is pre-approval enough to make an offer? ›
Just like you don't need to have mortgage preapproval to look at a house, you technically don't need preapproval to make an offer either. However, you may find that you'll have a hard time getting an offer accepted without your preapproval.
Is being prequalified for a mortgage good? ›
While prequalification is a good first step, it typically won't carry as much weight as a preapproval because a lender hasn't verified your information. Going beyond prequalification and getting preapproved by a loan officer is a critical step that shows you're serious about buying a home.
What are the chances of getting denied after pre-approval? ›
What are my chances of getting denied after preapproval?
| Loan program and purpose | Closing rate |
|---|
| Conventional purchase | 80% |
| FHA refinance | 65% |
| FHA purchase | 78% |
| VA refinance | 72% |
2 more rowsOnce a lender has preapproved you for a mortgage, you'll get a letter you can then take to sellers. This letter shows sellers you've already started working with a lender, and that the lender is willing to work with you.
How often does an underwriter deny a loan after pre-approval? ›
A mortgage underwriter typically denies about 1 in 10 mortgage loan applications. A mortgage loan application can be denied for many reasons, including a borrower's low credit score, recent employment change or high debt-to-income ratio.
Why would I be denied after pre-approval? ›
Find Out Why You Were Denied
Some common reasons for denial could include: Your credit score is too low. You don't have enough credit history. You've had a recent change in employment status or income.
What comes after pre-approval? ›
Most people will go through these six steps: pre-approval, house shopping, mortgage application, loan processing, underwriting, and closing. The process can be long and stressful, but make sure you don't rush it.
Preapproval can be extremely valuable when it comes time to make an offer on a house, especially in a competitive market where you might want to stand out among other potential buyers. Again, a seller will be more likely to consider you a serious buyer because you have had your finances and creditworthiness verified.
Can you buy a house without a pre-approval? ›
“While you do not 'need' a pre-approval letter from your lender in order for your offer to be accepted, I highly recommend all of my buyers present it,” says Denise Shur, a Realtor® with 1:1 Realty in San Jose, CA. In fact, “I do not look for homes with my buyers until they have a pre-approval letter from their lender.
How long does mortgage pre-approval take? ›
On average, it takes 7-10 days to get a pre-approval, although in some cases it may take less time. To speed up the home loan pre-approval time, you should gather your financial documents that the lender will require (e.g., W2s, proof of income, tax returns, etc.).
Is it better to be prequalified or preapproved? ›
Prequalification tends to refer to less rigorous assessments, while a preapproval can require you to share more personal and financial information with a creditor. As a result, an offer based on a prequalification may be less accurate or certain than an offer based on a preapproval.
Does prequalified mean I'm approved? ›
Even if you were prequalified, there is still a chance you could be denied if you don't meet the approval criteria for that particular card. While prequalification does not guarantee approval, it could give you an idea of which credit cards you may be eligible for, allowing you to focus on those options when applying.
Does prequalified mean I will get the loan? ›
Both pre-qualified and pre-approved mean that a lender has reviewed your financial situation and determined that you meet at least some of their requirements to be approved for a loan. Getting a pre-qualification or pre-approval letter is generally not a guarantee that you will receive a loan from the lender.
What's the difference between preapproved and approved? ›
What's the difference between approval and pre-approval? One word: verification. Pre-approvals are an estimate, not a promise. A pre-approval is a non-binding statement saying, based on a cursory review of your unverified financial status, that you are eligible for a loan up to a certain amount.
How many months before buying a house should I get pre approved? ›
For a smoother home buying process, it's advisable for you to obtain mortgage preapproval quite early, ideally weeks before you start thinking about making an offer on a house.
How long does mortgage approval take after pre-approval? ›
If you are pre-approved or credit pre-approved for a loan before you start the home shopping process, your mortgage could close in as little as two to three weeks after your offer is accepted on a home.
