Takeaways
- Pre-approval letters are issued by lenders indicating your maximum loan amount.
- Pre-approval letters can help you create a forecasted monthly budget.
- Lenders will check your credit score before providing a pre-approval letter.
- Many sellers will require a pre-approval letter to accept a home purchase offer.
- Pre-approval letters are issued based on verified financial data, such as income, assets, consumer debt, and other information.
What Is a Mortgage Pre-Approval Letter?
A mortgage pre-approval letter is a document from a prospective lender stating the amount of money they are willing to lend you to purchase a home. Your pre-approval amount is based on various personal information, including your income, credit report, debt-to-income ratio, and credit score.
If you want to buy your first home, a pre-approval letter shows sellers that you are a serious buyer. Many sellers compare the quality of offers to buy their homes and often require your pre-approval letter. Real estate agents often work with buyers’ agents to ensure that the buyers' agents understand what is required to make a serious offer on a home.
Pre-approval letters can be incredibly insightful. Although they are not an official loan or mortgage offer, they give you a sense of how much home you can afford, which lets you focus on finding the right home.
Securing a pre-approval letter from a mortgage provider is a critical step in home-buying. If you consider taking out a jumbo loan, a pre-approval letter can be help you in the negotiation phase.
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How Long Does It Take?
The amount of time it will take to get a mortgage pre-approval can vary substantially based on your financial situation and the internal processes of the lender you are working with. Generally speaking, getting a pre-approval letter can take one to several business days.
If your personal finances are relatively straightforward, you might receive a pre-approval letter within a day. However, the process could be protracted if your finances are more complex and need deeper due diligence or additional documentation.
You want to start your pre-approval process early enough so that it doesn't impede your home shopping. Once you find the home you want, you will want to be able to make an offer quickly, especially in hyper-competitive real estate markets.
Because a pre-approval letter is based on verified financial data, here are a couple of items you should have at the ready for the bank, credit union, or mortgage provider:
- W-2 or Paystubs
- Checking Accounts Statements
- Savings Account Statements
- Credit Card Statements
- Car Note Balance Report
- Student Loan Balance Report
Read More: What Is a Form W-2?
5 Steps Before Getting Pre-Approved
Before pursuing pre-approval, you must prepare yourself and your finances to boost your odds of getting the best possible mortgage terms. Let's look at some financial housekeeping that will give you the best shot of getting the pre-approval letter you need.
1. Review Your Credit Report
First, you should review your free credit report from the three primary credit bureaus: Equifax, TransUnion, and Experian. You are entitled to a free credit report annually.
Your credit report will contain detailed information about your credit activities, including late payments, credit inquiries, and outstanding debts for the last several years.
When you analyze your credit report, look for errors, inaccuracies, discrepancies, or other issues that could hurt your credit history. If you find mistakes, you can open disputes with the credit bureau to either have them corrected or removed before applying for pre-approval.
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2. Improve Your Credit Score
A higher credit score will give you better terms for your mortgage, like a lower interest rate. While the calculation of your credit score differs between your FICO and VantageScore, one of the best ways to boost your credit score is to make on-time debt payments.
Another high-impact move is to lower your credit utilization by paying down credit card debt, paying off student loans, or clearing other collections accounts. Alternatively, you can increase your credit limits by asking your existing credit card account for higher limits.
It would help if you also avoided any new hard inquiries to your credit, which could bring down your score significantly. Focusing on improving your credit score should be an ongoing money habit.
3. Lower Your Debt-to-Income Ratio
Your debt-to-income ratio, or DTI, is the percentage of your monthly income put toward paying debts. Lenders use this ratio to assess your overall ability to manage monthly mortgage payments.
Most lenders don’t want you to have a DIT north of 30%. A lower DTI can improve your chances of receiving approval for larger loans, like jumbo loans.
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4. Organize Your Finances
Now, you will need to organize your finances and gather all supporting financial documents. These include pay stubs, tax returns, bank statements, and anything else that can demonstrate your income, investments, and other assets. (Learn about the 7 different types of asset class.)
Having all these documents together will help streamline your application process because lenders generally require this information to evaluate your financial stability. Ensure you clearly understand your monthly budget, including how much you can afford for a down payment and ongoing mortgage payments.
5. Select a Mortgage Lender
Finally, choosing the right mortgage lender is a critical step in getting a pre-approval. Research various lenders to compare interest rates, terms, and customer reviews. Ask friends and family, even your real estate agent. Many real estate agents have lenders they work with frequently and can often make introductions.
Once you have narrowed down your options, contact the top few finance providers and ask about their pre-approval process and what it involves. While not required, getting a pre-approval letter from a provider you think you will use can for your house financing can streamline the official mortgage loan process.
When Should You Get Pre-Approved?
You should get a mortgage pre-approval letter before you start actively home shopping. Pre-approvals usually only last between 30 and 60 days, so you only want to get one when you are truly serious about your home-buying search.[1]
A pre-approval letter gives you the maximum amount you can borrow from a mortgage provider. This doesn’t mean that you should take the full loan amount. Instead, you should use your letter to understand the maximum you are willing to borrow based on your monthly budget.
You can plug and play with our down payment calculator and 50/30/20 calculator to see how much you can afford. Mortgage affordability is based on factors like your total loan amount and your annual percentage rate (APR).
Remember, your actual monthly mortgage bill will include your mortgage payment, interest payment, property taxes, and any private mortgage insurance. Calculating this will give you a sense of what you can afford.
Pre-Approval vs. Pre-Qualification
Many people use the terms pre-qualification and pre-approval interchangeably, even though they are very different. While they are both letters that indicate how much a specific lender is willing to give you, how the lender determines that threshold is different.
- Pre-Qualification Letters are a preliminary assessment based on self-reported financial information. Pre-qualification can typically be done on the phone or online in a few minutes and is based on unverified information.
- Pre-Approval Letters, on the other hand, are based on verified financial information, such as your income, assets, debts, and debt-to-income ratio.
Smart Summary
Shopping for a new home is a thrilling process, full of highs and lows. Securing a pre-approval letter is a requisite step to start seriously searching for a home. Remember that although a pre-approval gives you the maximum amount a lender is willing to provide, it doesn’t mean you should balloon your budget to purchase the most expensive house. You should be mindful of the hidden costs of homeownership, so balancing your monthly mortgage with other home-related expenses is a smart money move.
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Frequently Asked Questions
No, getting a pre-approval letter from a lender doesn’t obligate you to use that lender. Plus, a pre-approval letter is not the same as an official loan document. It is simply a letter stating the total estimated loan a lender will give you to purchase a home.
You can be declined a pre-approval letter. This could be because you need to improve your financial situation, such as increasing your income, improving your credit score, or paying off debt. (Read more about the Snowball vs. Avalanche method.)
Getting a pre-approval letter from a lender doesn’t mean you will get the best terms for your mortgage. It would help if you shopped around for mortgage providers because even a slight difference in interest rates on a 30-year fixed-rate mortgage can make a tremendous difference
(1) Consumer Financial Protection Bureau. Get a preapproval letter. Last Accessed January 14, 2025.
