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Home Buying & Selling

What Is a Mortgage Pre-Approval?

9 Minute Read

Many lenders claim that if you’re not pre-approved for a mortgage, you don’t stand a chance in the housing market. But what exactly does mortgage pre-approval mean? And will it really help you stand out from the battalion of buyers bombarding the real estate market?

Let’s break down the mortgage pre-approval process and find out!

  1. What is a mortgage pre-approval?
  2. Why would you want a mortgage pre-approval?
  3. Is a mortgage pre-approval the same as a pre-qualification?
  4. What do you need to get a mortgage pre-approval?
  5. How long does it take to get pre-approved?
  6. When should you get a mortgage pre-approval?
  7. Does the pre-approval expire?
  8. Does getting pre-approved commit you to anything?
  9. Do pre-approvals hurt your credit score?
  10. Is there anything better than a mortgage pre-approval?

1. What is a mortgage pre-approval?

Now folks, don’t be fooled: a mortgage pre-approval isn’t a promise that you’ll get a loan for the home you want to buy. A mortgage pre-approval only means a loan officer has looked at your finances—your income, debt, assets, and credit history—and determined how much money you can borrow, how much you could pay per month, and what your interest rate will be.

So, what’s so great about a mortgage pre-approval?

Once a lender has pre-approved 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. It gives sellers peace of mind to know they won’t be wasting their time with someone who couldn’t afford their house in the first place.

2. Why would you want a mortgage pre-approval?

While a pre-approval doesn’t guarantee you’ll get a mortgage, being pre-approved does have some advantages. Here are three reasons you might want a mortgage pre-approval:

  1. It gives you confidence in your search. When you know how much mortgage you can afford, you can look for houses within your budget. That way, you won’t have to deal with the heartbreak of falling in love with a house only to discover you can’t afford it.

  2. It puts you on the fast track to closing. Because most of your information is in the lender’s system, a mortgage pre-approval accelerates the loan process once you make an offer.

  3. It establishes your credibility as a homebuyer. A mortgage pre-approval shows home sellers that you have your finances in check, that you’re serious about buying a house, and that you won’t be denied a mortgage if they decide to sell you their home.

Is a mortgage pre-approval the same as pre-qualification?

No! Mortgage pre-approval and pre-qualification are not interchangeable.

The difference is really in the depth of the lender’s research. In order to be pre-qualified, you report your income, debt and assets to your lender, and your lender—without questioning your numbers—tells you, "Based on the numbers you gave us, you may qualify for this much of a mortgage."

But those numbers don’t have to be accurate. If you bent the numbers—if you weren’t precise about your income, your tax returns, or your debt—a pre-qualification will only give you a rough estimate.

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A mortgage pre-approval, on the other hand, is a thorough inquiry into your finances. A lender won’t simply ask how much income you make—you’ll have to prove it. Your lender will also pull your credit history, verify your income and assets, and assess your financial situation before they give you a mortgage pre-approval.

4. What do you need to get a mortgage pre-approval?

Since the mortgage pre-approval process is so rigorous, you’ll need to bring a number of documents when you meet with your lender. Here’s what your lender will ask for:

Identification

Driver’s license or U.S. passport.

Social Security card or number.

If you aren’t a U.S. citizen, a copy of the front and back of your green card(s).

Credit history. Your lender will want to check your credit score.

Employment verification. Your lender wants to know you have stable employment! They’ll likely call your current employer and ask about your employment and yearly salary.

Income

Recent pay stubs covering the last 30 days.

W-2 forms from the last two years.

Proof of any additional income.

Last two years of personal federal income tax returns with all pages and schedules.

Last two years of business federal income tax returns with all pages and schedules.

Assets

Bank statements that prove you have enough to cover the down payment and closing costs.

If someone is helping you with the down payment, you will need a gift letter stating that the fund is a gift and not an IOU.

Last quarterly statements for asset accounts, including your 401(k), IRA, stock accounts, and mutual funds.

5. How long does it take to get pre-approved?

As long as you have all your documents ready, you should be able to get a mortgage pre-approval on the same day you visit your lender.

However, lots of debt, a history of previous foreclosures, and a low credit score can slow down the process. If any of these apply to you, the pre-approval process can be much longer—anywhere from a few days to several months—depending on the complexity of your finances.

The only way to speed up the process is to give your lender all the documents listed above. Don’t forget (or hide) anything!

6. When should you get a mortgage pre-approval?

Any good real estate agent will tell you that getting a pre-approved mortgage is one of the first steps in the home-buying journey. But where exactly does this step fall? Before you even think about going into debt over a house, you should have all of the following taken care of:

You’re out of debt. You’ve squashed your student loans and kicked that car loan to the curb. You’re debt-free and financially ready to take on a mortgage.

You have an emergency fund with 3–6 months of expenses. Imagine buying a house and then losing your main source of income. How much would you need to make it 3–6 months while you or your spouse looked for a new job?

You have a down payment of at least 10%. If you haven’t saved 10%, that’s a good sign you shouldn’t buy a house. Having 10% is the minimum, but a down payment of 20% should be your goal! With 20% you don’t have to pay private mortgage insurance (PMI)—the insurance that protects the lender if your home ends up in foreclosure.

You’ve agreed to take out a 15-year mortgage. Never—never—take out a mortgage that’s longer than 15 years. Sure, if you take out a 30-year mortgage, your payment may be less every month. But not only will you be in debt for 15 years longer (dumb!), you’ll also end up paying way more than the home is worth in extra interest payments. You could almost buy another house with the money you lose in interest on a 30-year mortgage!

Your mortgage payments will be no more than 25% of your take-home pay. Any more than 25%, and you’re putting a serious strain on your income, your family, and your retirement.

7. Does the pre-approval expire?

Yes! All mortgage pre-approval letters have an expiration date. Many things can change after you get pre-approved, such as your income, credit history, or even the interest rate. Because of this, your pre-approval normally lasts for 60 to 90 days. When the pre-approval expires, you’ll have to update your paper work to get a new one.

8. Does getting pre-approved commit you to anything?

A pre-approval letter doesn’t bind you to any lender. That being said, if you do decide to take out a mortgage through another lender, you’ll have to repeat the paper work. But if you take out a mortgage through the lender who issued you a mortgage pre-approval, they’ll have your paperwork on file, which will save you time when you’re closing on a house.

9. Do pre-approvals hurt your credit score?

Getting pre-approved for a mortgage—even by multiple lenders at once—won’t hurt your credit score. While it may knock off a few points, it won’t drop your score by a significant amount.

If you pay off your debt and live debt-free, eventually you’ll have no credit score! You might be asking, How will I get pre-approved if I don’t have a credit score?

Don’t worry! You can still buy a home even if you don’t have a credit score. You just need to work with a lender like Churchill Mortgage that still does manual underwriting, a process in which a lender reviews your loan application and determines if they can trust you to repay the loan. 

Now, this doesn’t mean that just anyone can walk out with a home loan using manual underwriting. Specifically, you must:

  • Put at least 20% down on your home.

  • Choose a 15-year, fixed-rate conventional mortgage.

  • Have a strong employment history and personal income to support the loan.

  • Demonstrate 4–6 trade lines that span 18–24 months. These are just regularly recurring expenses such as rent, electric bills, water bills, cell phone bills, etc.

10. Is there anything better than a mortgage pre-approval?

With this competitive housing market, mortgage pre-approval letters have unfortunately started losing their authority. Most buyers have them, and in a multiple-offer situation, they just don’t have what it takes to make you stand out.

Fortunately for you, there’s something better!

If you want a true competitive advantage, Churchill Mortgage’s Certified Homebuyer program is a great option. When you become a certified homebuyer, you have all the advantages of a pre-approval like credibility as a homebuyer, confidence in your search, and an accelerated closing process.

But unlike with pre-approved mortgages that only involve a loan officer, your certified homebuyer application is reviewed by a mortgage underwriter—which is a huge advantage when you start shopping for houses! You’ll be able to close faster and have a leg up on other buyers who will probably have to wait for an underwriter to review their application.

Don’t sell yourself short with a standard pre-approval. Take your home-buying credentials to the next level today and get in touch with a Churchill Mortgage expert!

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