Mortgage Pre-approval Letter

Mortgage Pre-Approval: The First Step to Securing Your Dream Home

When you’re beginning the house-hunting process, it’s easy to get caught up in the excitement of browsing listings and touring homes. But before you get too far ahead of yourself, it’s important to get pre-approved for a mortgage first.

Mortgage Pre-Approval vs. Prequalification

Mortgage pre-approval and prequalification are two terms that are often used interchangeably, but they are not the same thing. Here’s a quick overview of the differences between the two:

Mortgage Prequalification

Prequalification is an initial step in the mortgage process that involves a lender reviewing basic financial information you provide, such as your income, debt, and assets. Based on this information, the lender will provide you with an estimate of how much you may be able to borrow. Prequalification is typically a quick and informal process that can be done over the phone or online, and it does not involve a credit check.

Mortgage Pre-Approval

Pre-approval is a more formal process that involves a lender reviewing your financial documents and credit score to determine how much they are willing to lend you. The lender will provide you with a pre-approval letter that outlines the terms of the loan, including the interest rate, loan amount, and other conditions. Pre-approval is typically a more involved process than prequalification and requires more documentation from the borrower.

Why is Pre-Approval So Important?

If you’re serious about buying a home, here are a few reasons why getting pre-approved for a loan upfront is essential:

Know what you can afford

Getting pre-approved will give you a clear understanding of how much house you can afford. This will save you time and heartache in the long run by avoiding the disappointment of falling in love with a home that’s out of your price range.

Identify eligible properties

Not every home will be eligible for your mortgage program. Some properties aren’t eligible for a VA, FHA, or USDA loan. Your agent can filter your listing alerts to homes that meet your specific loan criteria.

Be ready when you find the right home

Once you find your dream home, you’ll want to move quickly to make an offer. With a pre-approval letter in hand, you’ll be able to show the seller that you’re a serious buyer and have the financial means to close the deal.

Strengthen your bargaining position

In a competitive market, having a pre-approval letter can make all the difference. Sellers are more likely to take your offer seriously if they know you’ve already been approved for a mortgage. You’ll be in a stronger bargaining position, which could help you negotiate a better deal on the home.

Prevent negative surprises later on

During the pre-approval process, the lender will review your financial history and credit score. This will help identify any potential issues that could affect your ability to obtain a mortgage. By addressing any concerns upfront, you can avoid surprises later on in the home-buying process.

Avoid wasting time

Having an approval letter in hand will give you more peace of mind. It would be unfortunate to invest many hours of your time (as well as the seller’s time and real estate agents’ time) only to find out the financing won’t work for the property you like.

Take the time to get pre-approved first, so that you aren’t scrambling to apply when you find the right property. You don’t want to miss out on your dream home by not being prepared!

Does applying for a mortgage impact your credit score?

Yes, applying for a mortgage can have an impact on your credit score. When you apply for a mortgage, the lender will typically pull your credit report to review your credit history and score. This is known as a hard inquiry and it can cause your credit score to drop by a few points.

The good news is that the impact of a hard inquiry on your credit score is typically small and temporary. Your credit score should bounce back within a few months as long as you continue to make your payments on time and keep your credit utilization low.

It’s worth noting that if you apply for multiple mortgages within a short period of time (usually within a 45-day window), it will be treated as a single inquiry on your credit report. This is known as rate shopping and it allows you to compare mortgage offers without significantly damaging your credit score.

House hunting can take time. To avoid any negative impact on your credit score, it’s a good idea to check with your lender before renewing your pre-approval (after several months have passed) to see if they plan to run a new credit check or not.

Gather Your Documentation

When you apply for a mortgage, the lender will typically ask for various documents to verify your income, assets, and debts. Requirements may vary by lender, but generally you need:

  • Proof of income:
    • Pay stubs (last 30 days).
    • IRS Form W-2s (last 2 years).
    • IRS tax returns (last 2 years).
  • Bank statements: You’ll need to provide all checking and savings account statements for the past few months to verify your assets and savings.
  • Investment information: Provide statements for 401(k)s, stocks, and other investments.
  • Debt information: The lender will want to know about any outstanding debts, such as credit card balances, car loans, or student loans. You’ll need to provide statements showing the current balances and minimum payments.
  • Employment history: Provide 2 years of employment history, documenting any gaps in employment. The lender will likely contact your current employer to verify your employment and income.
  • Social Security number: You’ll need to provide your Social Security number so the lender can pull your credit report.
  • Driver’s license or passport: You’ll need to provide a government-issued ID to verify your identity.
  • Proof of residency: You’ll need to provide a recent utility bill or other proof of residency to verify your address.
  • Residency history: You’ll need to provide 2 years of addresses and rental/mortgage information.
  • Credit card/billing information: The lender may charge for running a credit report and appraisal fee.

Self-employed borrowers may also need to furnish copies of the most recent business tax returns (2 years), year-to-date profit & loss statements and balance sheets, Form 1099s or Form K-1, copies of business licenses, and CPA contact information.

VA Loan borrowers may also need to supply additional records, such as Veteran DD214 or Veteran Reservists DD256.

Additional documentation may be required for other situations, including divorce, bankruptcy, child support, job relocation (financed by an employer), investment properties, and income from Social Security/retirement/disability.

Getting pre-approved for a mortgage can be a tedious process, but it’s a crucial first step.