If you’re about to start house hunting, it’s best to go into the process armed and ready. That includes lining up financing before you walk into your dream home.
A mortgage pre-approval letter demonstrates that you have the financial means to buy a house, helping you stand out as a serious buyer.
Here’s what you need to know about how this document works in the homebuying process and how to get one.
What is a Mortgage Pre-Approval Letter?
A mortgage pre-approval letter is a document from a lender stating you’ve been green-lighted for a home loan of a certain amount. While the terms “pre-approval” and “pre-qualified” are often used interchangeably, there is a slight difference.
“I see many first time home buyers make the mistake of getting pre-qualified and not pre-approved,” says Realtor Jason Gelios of It’s All About The Real Estate. “A pre-qualification is when a lender gets information from an applicant without actually verifying any of it — this is usually due to the applicant just sharing information verbally without documentation.”
While mortgage pre-qualification is an informal understanding between a lender and borrower, a pre-approval letter carries much more weight, especially when it comes to making a bid on your dream home.
Unlike mortgage pre-qualifications, pre-approval letters are official documents from a lender stating they’ve reviewed all of your financial information as a borrower and have approved you for a loan of a certain amount. The financial information they review will likely include things like your income, credit score and outstanding debts. Because this letter is only given once all of your financials have been verified, it means more than a simple pre-qualification.
Why You Need a Mortgage Pre-Approval Letter
From the home seller’s point of view, pre-approval letters provide reassurance that you, the buyer, can actually afford to buy their home — and this reassurance goes a long way, especially if you find yourself making an offer in a competitive seller’s market.
“A pre-approval letter is oftentimes the most overlooked step in the home buying process,” says Gelios. “One of the major benefits of having a pre-approval letter ready is that it saves time and allows an offer to be sent faster to the seller’s agent. It also shows that a home buyer is able to move forward with their offer, and this goes a long way when competing with other buyers in the market.”
This is why it helps to have your pre-approval ready before you actually need it.
When to Get a Pre-Approval Letter
Having your mortgage pre-approval letter before you make an offer on a home means knowing your budget ahead of time and contacting a lender once you begin your home search.
“You should obtain a pre-approval as soon as you decide you’re ready to start looking at homes,” says Realtor Raven Reed of Raven Reed Realty. “Realtors will need this letter in order to be able to start showing you properties. Sellers don’t want to waste time cleaning and vacating their homes for buyers that aren’t qualified — so they require them.”
Another reason to get pre-approved for a mortgage early is that it gives you a better understanding of your home-buying budget. Without running the numbers on your projected down payment and monthly mortgage payments, it can be hard to fully understand how much house you can afford.
“Shopping outside of your budget can be detrimental to the process, and create unrealistic home expectations for your current financial situation,” says Reed. By getting your pre-approval out of the way early, you’ll be able to narrow down your home search to the houses you like that are within your price range.
How to Get a Pre-Approval Letter
Getting a pre-approval letter is easier than you may think. The best way to start is by finding a lender you like and completing a mortgage application. You can find a mortgage lender through your real estate agent or local recommendations. Keep in mind that just because you get pre-approved doesn’t mean you have to go with that lender later. You can always shop around rates with multiple lenders.
Once you approach a lender, you’ll be asked to provide some basic financial and contact information. This will include things like proof of income (or employment verification), bank statements and details on debts you’re paying. You’ll also need to have a home loan amount in mind. This is where knowing your home-buying budget is important. Assuming your ask is within reasonable limits based on your financial profile, pre-approval letters are often processed relatively quickly — typically within a few days.
Other Things to Keep in Mind About Getting Pre-Approved
Pre-approval letters often result in a hard inquiry on your credit. This is noteworthy because these credit checks can sometimes lower your credit score. While they likely won’t lower it significantly, it’s good to limit the number of hard inquiries happening in a short time frame.
Your pre-approval letter is typically good for several months. Since the exact time frame can vary, it’s good to ask your mortgage lender how long your letter will be good for. Keep in mind that you should never approach a seller with an expired pre-approval letter, only a valid one.
One final word of caution about pre-approval letters: They’re not an absolute guarantee of getting a home loan.
“I have seen many people make silly financial decisions after getting a pre-approval letter that ultimately cost them a home purchase,” said Brittany Hovsepian, owner of The Expert Home Buyers. “Don’t go out adding a new car to your debt-to-income ratio after getting a pre-approval letter and think that isn’t going to come up during the underwriting process of home loan approval.
“Long story short, when you are shopping for a home, your financial situation needs to remain relatively unchanged throughout the process or you will be putting loan approval status in jeopardy.”
Larissa Runkle is a contributor to The Penny Hoarder.