Skip to main content

How to Get Pre-Approved For a Mortgage

8 minute read

Devon Taylor

By Devon Taylor

Reviewed by Expert Riley Adams, CPA

When you’re ready to buy a house, a mortgage pre-approval is a smart step to take. Whether it’s your very first house or just your next one, mortgage pre-approval will ease your stress and save you a bunch of time. After going through the pre-approval process, you’ll have a much clearer idea about your overall house-hunting budget. You’ll also be able to see how your monthly mortgage payments sync up with the rest of your budget. Plus it may give you the upper hand in those high-pressured real estate bidding wars that seem more and more common.

This article will educated you about the mortgage pre-approval process — what it is and why it’s important, plus how to go about getting your own pre-approval. Happy house shopping!

What is a Mortgage Pre-Approval?

The best way to describe the mortgage pre-approval process is in medical terms. Consider it the “annual physical” of your finances. It’s an in-depth, complete examination of everything related to you and your money. It includes your income sources, outstanding debts, savings, valuable assets, financial obligations, credit history and score, and even your employment history.

Potential mortgage lenders want to know every little detail before they commit to lending you hundreds of thousands of dollars. You can’t really blame them. Once they have all the information, lenders will be able to tell you how much of a mortgage they are willing to offer you.

What You Will Need

As a bare minimum, you will probably need the following documentation in order to get pre-approved for a mortgage. Your potential lender may ask for additional information too. Here are some of the items you will most likely be asked to submit in order to receive a mortgage pre-approval.

Like we said, this is a serious financial examination. Lenders will try to leave no stone unturned in their attempt to vet you.

A Note About Gift Letters

Here’s an important point related to a gift letters. If you have an existing line of credit shared with another person (who is not applying for this pre-approval), it may or may not actually reflect your ability to repay the loan. You can submit a letter which documents your lack of responsibility for repaying the debt in question. For example, if you co-signed another person’s student loans but that person has paid the previous 12 months without your help, the lender may waive this loan from your financial picture.

Pre-Approved or Pre-Qualified?

While these two terms sound the same, they actually mean quite different things. So don’t make the mistake of confusing them.

A pre-qualification involves a lender gathering a significant amount of your financial information and offering you an estimated loan amount. In short, it’s not binding or set in stone in any way. A very crude way of putting it is that the lender basically filled out a mortgage calculator on your behalf. It’s nothing more than that.

A home seller may not accept your offer from you if you only have a pre-qualification letter — especially if another offer comes from someone with a pre-approval letter, vouching for their ability to secure adequate financing to purchase the home. Sellers want certainty that the person they choose to sell their home to can actually receive a loan and close the transaction.

A pre-approval, on the other hand, is the real deal. It involves filling out a mortgage application and the lender pulling your credit report. It’s a hard credit check, which may temporarily cause your credit score to drop slightly. The advantage is that you can literally use this pre-approval to make an offer on a house. If you’re pre-approved for $500,000, you can make an official offer for a house that costs $450,000 without it being contingent on securing financing.

Similar to a mortgage pre-qualification letter, securing a mortgage pre-approval letter might make your offer more attractive to the sellers, especially when compared to another potential buyer who does not have a pre-approval letter.

How Soon Is Too Soon?

Buying a house can be a lengthy process. Between the pre-approvals, shopping around, making offers (and counter-offers), dealing with real estate agents and lawyers, it could take you months from the time you decide to buy a house and the time you put your new key in the front door for the first time.

However, most mortgage pre-approvals are only good for 60 or 90-days. Occasionally you will find some lenders willing to honor a pre-approval for 120 days. If you don’t complete the purchase of a house in that time frame, you’ll have to re-submit new copies of all those documents you already submitted. It could for you or against you. For example, if you cleared out some debt in the last couple months, maybe you’ll be eligible for a larger mortgage. On the other hand, interest rates may have shifted in a direction that will cost you more.

The short answer is this: don’t bother with a pre-approval until you’re very serious about making an offer. You may not know the exact house, yet. But you’ll know roughly what price range and location you’re interested in. Then, when you do find “the one,” you’ll be ready to strike quickly. Hopefully that pre-approval letter helps seal the deal.

You Don’t Have To Take It All

Here’s a tip that the lender probably won’t tell you. You don’t have to use every dollar they offer you. Sure, they crunched the numbers and came up with an amount that they are confident you can pay. However, that doesn’t mean the amount won’t leave you overextended or cash poor. Do you really want to live in a reality where you can only afford your home if you drive a 15-year-old car, eat Ramen noodles four times a week, and never take a vacation? Maybe that works for you. But maybe it shouldn’t.

Just because your lender pre-approves you for $750,000 doesn’t mean you can’t look at houses in the $650,00 range. In fact, we recommend that you do. It’s perfectly okay — advisable, even — to not use every bit of your pre-approval amount. As an added bonus, your down payment will now go a bit farther and your monthly payments will be a bit lower. Use those savings to invest more or pay down other debt. Or, you know, to buy a car that was built this decade.

The Process

Once you’ve gathered all the required information, you’ll need to fill out a mortgage application. If you’re co-applying (with a spouse, for example), you will both need to provide your financial documents. Then you’ll need to determine the following things.

Those items, along with your personal, employment, and financial information, will determine the success or failure of your mortgage application.

Some Other Factors

We’ve already mentioned your credit history, credit score, and employment history as relevant information. Here are two other values that you need to be aware of.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is a calculation of all of your monthly debt obligations in relation to how much money you make. It will factor in auto loans, student debt, revolving credit (like a credit card or line of credit), or any other obligations you have. Child or spousal support may also factor in here. Lenders will divide the sum of these debts by your gross monthly income.

If your DTI is higher than 43%, you may not qualify for a mortgage at all. You are at a higher risk of defaulting on your mortgage if your DTI is too high. Ideally, your DTI will be under 30%. That shows lenders that you have been responsible with previous debts. This value is why financial experts constantly recommend you pay down as much debt as you can before applying for a mortgage.

Loan-to-Value Ratio

The loan-to-value ratio (LTV) is another important calculation. It’s determined by dividing the amount of your loan by the value of the property you are buying with it. It may require a professional appraisal. A high LTV implies you are using more financing to purchase a home as opposed to placing a bigger down payment on the property, resulting in more equity in the property. Your down payment as a percentage of the home’s value is the single biggest factor in what your LTV ends up being.

The lender wants you to have some of your own investment in this game. It helps ensure you won’t walk away from your mortgage if times get tough. The higher your down payment, the more immediate investment you’ve instantly made in your property. Here’s some quick examples:

Shop Around

Like any other product you buy (and a mortgage is definitely a product that you buy), you should shop around. Seek pre-approvals from a few different lenders. They may come back with slightly different amounts or interest rates. Don’t be afraid to use those differences to negotiate better terms with your preferred lender.

The good news is that seeking more than one pre-approval won’t really damage your credit score. Shopping multiple mortgage lenders within a short time period (45 days) generally only counts as a single credit inquiry. Since you have nothing to lose (except your own money, if you just take the first offer you’re given), make sure you do some mortgage homework.

The Bottom Line

If you’re serious about buying a house, the pre-approval process is an important step to take. In ultra competitive housing markets, having a pre-approval letter to go with your offer could be the difference between buying your dream house or being forced to keep looking. Even if going through the process makes you face some unfortunate financial truths (like your debt is hindering your ability to buy a house or your down payment is simply too small), at least you’ll know exactly where to focus your efforts to achieve your house dreams.

Home Pre-approval CalculatorShutterstock
Riley Adams

Financial Expert

Riley is a San Francisco-based senior financial analyst and CPA at Google who also runs the personal finance site, Young and the Invested. He and his wife have one child together and all three enjoy exploring the outdoors of Northern California. Previously, he worked for a public utility in New Orleans for six years after graduating from Penn State University with his M.S. in Applied Economics and Demography.

Explore

What is an FHA Loan? Can You Use One as a Mortgage? Home Ownership

What is an FHA Loan? Can You Use One as a Mortgage?

Owning a house is an accomplishment that takes quite a while to achieve. Luckily, there are plenty of ways you can make that dream come true, especially nowadays. Purchasing a house with an FHA loan is one of them. You may have previously heard about FHA loans. However, did you know you can use this […]

Read More about What is an FHA Loan? Can You Use One as a Mortgage?

6 minute read

Should You Refinance Your Home to Pay Off Student Debt? Mortgage

Should You Refinance Your Home to Pay Off Student Debt?

These days, getting creative with your money puts you ahead of the game. One way you can consolidate debt is refinancing your home to pay off your student loan debt. That said, refinancing your home may not be the smartest option for everyone. To help guide you towards that decision, we’ve put together the following […]

Read More about Should You Refinance Your Home to Pay Off Student Debt?

5 minute read

Better Mortgage Review House, Calculator, & Cash on Desktop Mortgage

Better Mortgage Review

Founded in 2014, Better Mortgage provides consumers with an online platform that offers mortgage rates as well as access to homeowner’s insurance and leading real estate agents across the U.S. Borrowers can secure rate quotes, apply for loans, and sign required documents all online. Like the new breed of home loan providers, Better Mortgage doesn’t […]

Read More about Better Mortgage Review

5 minute read

AmeriSave Review Mini House on Top of Mortgage Application Mortgage

AmeriSave Review

AmeriSave is a mortgage financing (and refinancing) company that has been in business since 2002. It’s headquartered in Atlanta, Georgia. The company operates throughout the United States. It primarily manages mortgages online, using technology to offer customers low interest rates through an online only application process. AmeriSave has issued more than $55 billion worth of […]

Read More about AmeriSave Review

6 minute read

Quicken Loans Review Man Holding Mini Home & Money Mortgage

Quicken Loans Review

Quicken Loans is a mortgage lending company based in Detroit, Michigan. It was founded by billionaire businessman Dan Gilbert in 1985. Gilbert also owns the Cleveland Cavaliers and had a public feud (and reconciliation) with LeBron James. Today, Quicken Loans is the largest online retail mortgage lender in the United States. Since 2013, the company […]

Read More about Quicken Loans Review

6 minute read

See all in Mortgage