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The Ins and Outs of Mortgage Pre-Approvals

The Ins and Outs of Mortgage Pre-Approvals

8 min read
Pre-Qualification vs Pre-Approval: What's the Difference?

Many people use these terms interchangeably, but they actually refer to two different stages in the mortgage process:

  • Pre-Qualification: This is an initial, informal assessment of your borrowing potential based on information you provide about your income, assets, and debts. Lenders use this to give you a general idea of how much you might be able to borrow. However, it's not a firm commitment and doesn't carry much weight with sellers.

  • Pre-Approval: This is a more rigorous process where you complete a mortgage application and the lender verifies your financial and employment information, checks your credit, and analyzes your financial situation to determine how much they're willing to lend you. If you qualify, they'll provide a pre-approval letter stating the loan amount, terms, and any conditions that must be met before closing.

Why Getting Pre-Approved Is a Game Changer

Documents You'll Need for Pre-Approval

To assess your financial readiness for a mortgage, lenders will request various documents that paint a picture of your financial health. Be prepared to provide:

Pre-Approval Document Checklist
  • W-2 forms from the past two years
  • Pay stubs from the past 30 days
  • Federal tax returns from the past two years
  • Bank statements from the past 60 days
  • Statements for any investment accounts or other assets
  • ID and Social Security number for credit check
  • Proof of any supplemental income
  • Explanation of any recent credit inquiries
  • If self-employed, profit and loss statements and 1099 forms

Your lender will analyze these documents along with your credit report to assess your debt-to-income ratio, cash reserves, and overall financial fitness to determine your maximum loan amount and interest rate.

The Shelf Life of a Pre-Approval

Some lenders offer a longer lock-in period for pre-approvals, but this often comes with a fee. It's best to wait until you're ready to actively start house hunting before getting pre-approved to avoid multiple rounds of paperwork.

Navigating VA Loan Pre-Approvals

If you're an active-duty service member, veteran, or surviving spouse, you may be eligible for a VA loan. These loans are backed by the Department of Veterans Affairs and offer several benefits, including no down payment requirement and no mortgage insurance. The pre-approval process is similar to conventional loans, but with a few additional steps:

Obtain your Certificate of Eligibility (COE)

Your lender will need your COE to verify your eligibility for a VA loan. You can request it online through the VA's eBenefits portal or by mail using VA Form 26-1880.

Understand the VA's credit standards

While the VA doesn't set a minimum credit score, most lenders will want to see a score of at least 620. The VA also has guidelines for debt-to-income ratios and residual income that your lender will consider.

Be prepared for a VA appraisal

Once you're under contract on a home, the VA will order an appraisal to assess the property's value and condition. The home must meet the VA's Minimum Property Requirements for the loan to be approved.

While the VA loan process has some additional requirements, these loans remain one of the most beneficial financing options for those who have served our country.

Your Pre-Approval Action Plan

Now that you understand the ins and outs of pre-approvals, here's your action plan to get started:

  1. Check your credit report and scores: Get copies of your credit reports from the three major bureaus (Equifax, Experian, TransUnion) and review them for errors. Pay down debt if needed to improve your credit scores and debt-to-income ratio.

  2. Gather your financial documents: Use the checklist above to get all your documents in order before applying for pre-approval. This will save time and hassle during the process.

  3. Research and compare lenders: Look for lenders that offer competitive rates and have experience with your situation (e.g., first-time homebuyer programs, VA loans). Get recommendations from friends, family, or your real estate agent.

  4. Apply for pre-approval with multiple lenders: Submitting applications to several lenders allows you to compare offers and find the best deal. Just be sure to do all your applications within a 14-day window to minimize the impact on your credit scores.

  5. Review and understand your pre-approval letter(s): Your pre-approval letter will state your maximum loan amount and the terms the lender is offering. Make sure you're clear on any conditions you need to meet and the timeframe for which the pre-approval is valid.

  6. Use your pre-approval to guide your home search: Now the fun part begins! Share your pre-approval letter with your real estate agent so they can help you find homes that fit your budget. Make sure to submit a copy with any offers you make to show sellers you're a serious and qualified buyer.

Remember, a pre-approval is a conditional commitment from a lender. Once you have a contract on a home, you'll need to complete a full mortgage application and go through the underwriting process to secure final loan approval. But by getting pre-approved, you're taking a significant step towards homeownership and setting yourself up for a smoother, less stressful home buying experience.

    The Ins and Outs of Mortgage Pre-Approvals | PCS Pal Blog