Pre-Approval Letter

For a prospective homebuyer, a pre-approval letter can be a major boon in the home-search process. A pre-approval letter includes documentation stating exactly how much mortgage you have already been conditionally approved to borrow. This shows evidence both to real estate agents and to sellers that you’re both qualified and serious about making a deal on a property. So while it’s technically not a guarantee that you’ll get a mortgage, having a pre-approval letter is a great way to line yourself up to get the home you want.

In a nutshell, a pre-approval letter is a conditional promise from a mortgage lender that you’re qualified to borrow up to a certain purchase price, and that the lender intends to make you that loan (barring any changes in circumstance). It’s a great asset during house-hunting.

The letter will demonstrate what kind of property you can get into based on your financial situation and credit worthiness. In addition to the loan amount, it may note your loan program, loan type, and qualified interest rate. 

And it will say how long the pre-approval offer will last before it expires—likely between 30 and 90 days. Aim to get your pre-approval letter only when you’re seriously shopping for a home and ready to make a move when you see one you love.

Pre-approval and pre-qualification sound similar, but they’re not synonymous. These are really sequential, not interchangeable, steps in the process, and there are a few key differences to know.

Pre-qualifying is a step that comes before pre-approval: It gives you a sense of the size of home loan you are likely to qualify for. It comes from data that you provide for a mortgage lender, which then makes its estimate of how much it might intend to lend you based on the information you’ve provided about your financial situation—including details about your income, assets, debts, and credit score. This step doesn’t always require documentation, just self-reported info. There’s typically no cost to do this.

Pre-approval, on the other hand, typically does require documentation to verify all that data, including a credit inquiry. (Your credit report will reflect the inquiry.) This process then results in a pre-approval, during which time you will get a letter that actually states your conditional approval for a loan amount. While a pre-approval letter is not a guarantee that you will get a home loan, it’s a great early tool in the home-buying process because it is a conditional commitment to give you a mortgage unless circumstances change.

Why might circumstances change? Well, consider that your pre-approval is based on information you provided during this part of the process. Between the time you provided that data and the time you might be trying to close on a home, these data points might change: You might lose your job, for instance. Or the lender’s mortgage guidelines might change. And if such things happen, your loan application could still be denied at a later stage.

To sum up the difference between pre-approval and pre-qualification: Pre-approval is more of a sure bet (although not a guarantee), offering more evidence of your ability to get a loan than pre-qualification alone.

If you’ve already been pre-qualified for a mortgage loan, you probably have a good sense of your own financial picture and ability to borrow, but to get to the pre-approval step, you must officially complete a mortgage application to verify everything. You will have to supply your mortgage lender with a range of documentation in order to review your finances, including your credit history and credit score. 

For the approval process, you’ll need to supply income employment and financial information, including documentation such as pay stubs, tax returns, W2s, bank statements, employment history, debt, driver’s licenses, and liability info, as well as documents showing any additional sources of income and other assets. You’ll also need valid identification, including a social security number for a credit check.

Be aware that (unlike with pre-qualification), lenders may charge an application fee for pre-approval, which can even range into the hundreds of dollars. The entire process may take just days.

Do your homework to research lenders so that you feel satisfied you are working with a group that has both the knowledge and expertise—not to mention the temperament—you would like in a partner during this process, which likely represents a significant moment in your life. And if your financial picture is somewhat complex, such as if you recently changed jobs or have blemishes in your financial history, it helps to have personalized service to help walk you through the process. For that reason, it’s a great idea to work with an existing bank relationship.

Although getting preapproved may be a commitment in effort (and in dollars), there are many benefits to going through this step if you are serious about buying a home. 

First of all, it gives you a real sense of how much you can actually borrow so you can adjust your expectations as you consider homes that you can feasibly afford, narrowing your search to homes in your real-world price range. 

As well, it shows sellers that you have the power to borrow the amount you are offering on their property. When you’re ready to make an offer, yours may be more competitive, because sellers know you’ve already been conditionally approved for a mortgage and your financing is likely not going to be an obstacle.

It also lets real estate agents—who get paid on a commission basis—know that their efforts to work with you are worthwhile. 

And even if the process doesn’t immediately yield the results you were hoping for, it might help you in another way you may not have even considered: Because loan officers will review your financial picture in this process, they might unearth potential obstacles that could keep you from getting a mortgage — and if that happens to you, you can be in the position to make some changes before you fall in love with a listing. For instance, you may need to improve your debt-to-income ratio, pay off some credit card or student loan debt, save for a bigger down payment, or resolve any issues with your credit report.