The process of getting approved for a mortgage loan and buying a home is a long one with a considerable number of steps. You’re going to need to have the money for a down payment ready, and get your financial documents ready for submission to your lender. You’re going to need to make certain that your credit score is high enough to inspire confidence in your lender, and if that’s not the case, you’ll need to begin to take the steps to improve it.
Finding a home that you and your family love is, obviously, an important step in the home-buying journey, but it’s far from the first one. In today’s increasingly competitive housing market, it’s important to be prepared. Unless you’ve already been pre-approved for a loan, you might be disappointed when you find a home you love, even if you can afford it.
The very first step in buying a home is, above all else, doing your research. If you’re new to the process, you likely have a lot of questions, such as what it means to be pre-approved, and how that differs from being actually approved. You might also be wondering how pre-approval differs from pre-qualification, and what documents are needed. To help you along in your home buying journey, we asked lending experts to answer some common questions about securing the mortgage for the home of your dreams.
What is pre-approval, and how does it differ from being approved for a loan?
When you’re approved for a loan, you’ll receive a commitment letter from the lender, detailing your mortgage agreement and loan terms, including the monthly costs and the annual percentage rate on your loan. You’ll also learn of any conditions you need to meet before the sale is closed, such as obtaining homeowner’s insurance.
But before you get an approval, you’re going to need to get a pre-approval.
Think of the pre-approval as an annual check-up, but for your financial health. When you go through the pre-approval process, your lender will take a look at your income, credit score, and assets and liabilities to see if you qualify for a loan, and if so, what the maximum amount of your loan and monthly payment could be. The exact nature of what you will need to submit and what you might qualify for will vary based both on your situation and which lending company you choose to go with.
“Not all pre-approvals are created equal,” says Peter Boomer, a mortgage executive from PNC Bank. “There are pre-approvals which review minimal detail and require only a soft credit pull,” which is a light look at your credit history that doesn’t temporarily lower your score, “but no verification of key buyer information.”
You can view that light version of pre-approval as a way to kick the tires on your financial situation. It might be helpful if you’re dipping your toes into the housing market and you want to get a sense of what might be feasible for you. Once you get a sense of that, you can move forward with a more thorough pre-approval. “A full pre-approval is a deeper dive into the buyer’s credit history and provides a demonstration of the ability to pay the mortgage which includes a full underwriting review of income, employment and assets needed for the down payment, and reserves,” adds Boomer. “This tells the seller that a prospective buyer has the means to successfully purchase and has the mortgage in hand.”
Boomer adds that in addition to being a provisional commitment from your lender when you find the right home, a pre-approval will make the rest of the process go smoother, including the eventual full approval.
“A pre-approval often means the closing process may be expedited, with only the appraisal and inspection as remaining steps,” he says. “Being pre-approved for a mortgage makes the bidder a more attractive homebuyer to the seller and that is a huge step in today’s heated housing market in which there are often multiple bids on homes.”
How does pre-approval differ from pre-qualification?
The terms pre-approval and pre-qualification are often used interchangeably, but they are not quite the same. Pre-qualification is a much lighter version of the pre-approval process.
You’ll be asked to share information such as your income, debt, and the amount of money you have saved for a down payment, but this information won’t be verified. From there, your lender will give you a sense of the type of loans you might be qualified for. There’s typically no commitment on either end, so it’s a good way for you to feel out your lending company to see if they’re a good fit for you.
“One of the best things a potential buyer can do—long before they start touring homes—is to find a good lender and get pre-qualified,” says Ryan Dibble, COO of real estate startup Flyhomes. “Pre-qualification tells you roughly how much you can afford based on what you report about your down payment, assets, credit, and income and can uncover any obstacles you might face when it comes to securing your financing. Keep in mind that pre-qualifications are based on assumptions and are only a guesstimate.”
What about pre-underwriting?
The underwriting process is often the longest part of closing a deal for a home, and potentially the most stressful. This is when the lender will give your finances a deep, deep vetting to make sure everything is on the up-and-up and you’re not too big of a risk. If you’ve made any errors or didn’t disclose any pertinent information, the underwriting process is where you might be tripped up.
If you decide to go for a pre-underwriting process, you can get this potentially lengthy process out of the way early so there are no surprises down the line. This will also make you a more attractive candidate to people who are selling their homes, as it shows you’re both a safe bet and serious about closing a deal.
“Getting pre-underwritten is the number one thing all homebuyers should do at the start of the process to fully understand their budget, make their offers stronger, and ensure a smoother closing process,” says Dibble. “With pre-underwriting, the lender carefully reviews your ability to pay back the loan before a property is involved. Put simply, pre-underwriting is the only reliable answer to a big question: ‘how much can I spend on a home?’ It’s a written commitment from a mortgage lender confirming the loan amount and program you’re qualified for.”
Dibble adds that “once you are pre-underwritten you can buy a house immediately and easily close within 30 days in most markets.”
When should I get a pre-approval?
Once you decide you’re serious about buying a house, you should start the process of obtaining a pre-approval before you do anything else. If you decide to look into obtaining a loan after you find a place you like, you run the risk of setting yourself up for disappointment.
“If you are thinking of becoming a homeowner, start the pre-approval process immediately – even if you are thinking 6-12 months out,” says Kim Chichester, Division Manager at Geneva Financial. “Do not go out and look at houses before you are pre-approved. You are setting yourself up for disappointment or even failure of making a timely offer on the home of your dreams.”
“What if you find the perfect home for sale at $400,000, only to find out the maximum loan amount you qualify for is $350,000,” adds Chichester. “Every home you look at after that will never compare. What if you are not approved for a home, find the home of your dreams and the sellers are only accepting offers from fully pre-approved buyers until 6 pm that night?”
How do I find the right loan?
It always pays to shop around, as every lending company is different, and the first offer you get might not necessarily be the best one. “I recommend talking to at least two lenders, but ideally three or four. Ask each of them for a full written quote or an official loan estimate that gives you the full picture based on your specific needs,” says Dibble. “Having multiple options provides you with more certainty that you are getting a good deal. You might be able to leverage one lender’s quote to negotiate an even better deal with a different lender.”
How long does it take to get a pre-approval loan, and how long is it good for?
A pre-approval for a mortgage is typically valid for 60 to 90 days. The amount of time it takes to get approved for one can vary. “It’s an in-depth process that may be longer with first-time homebuyers and recently divorced or widowed homebuyers,” says Chichester. “The process can be completed in 15 minutes with an experienced borrower providing all their income and asset documentation at application or it could take two hours when an applicant has questions.”
It’s not a bad thing if it takes a little while to get a pre-approval, says Chichester, so go ahead and ask all the questions you want. “Buying a home is the biggest purchase most people will ever encounter so you should align yourself with a lender that is willing to take the time to make sure all your questions are answered and you are comfortable with the process and level (and type) of communication provided.”
What information do I need to provide for the pre-approval process?
According to Chichester, you should plan on having the following information available when you meet with a lender:
- Government ID: This includes a driver’s license, state-issued photo identification card, or passport. In certain cases, borrowers may also be asked to provide a copy of a Social Security card.
- Proof Of Income: Bring pay stubs covering the last 30 days, and W-2 tax forms for the past two years.
- Asset Statements: Bring 60 days’ worth of statements for all of your accounts, including retirement accounts such as a 401K or IRA.
- Debt Statements: Bring a record of your current debts, as well as proof of recent monthly payments.
Can you still get a pre-approval if you have bad credit?
Even if your credit score isn’t as high as you would like it to be, you still might be able to qualify for a pre-approval loan. It will likely be at a higher interest rate than you might want, but you always have the option of putting your home search on the back-burner while you focus on fixing your credit score, and an experienced lender should be willing to help you devise a plan of action to get you where you need to be.
“If you believe you have a challenging credit history and want to purchase a home now or in the future, you should schedule a consultation with a mortgage professional immediately,” Chichester says. “Your lender will complete a full pre-approval and if you are not eligible for a home loan right away, you will be provided with a detailed action plan to get you where you are able to purchase a home.”
But Chichester also stresses that your credit score is only one of many factors that lenders will consider when it comes to pre-approval.
“I’m an old school lender and will always refer back to the 5 C’s of credit because the formula has worked for ages and it is easy to relay these factors to my borrowers,” she says. “Each of the following is a compensating factor in deciding a loan.”
- Character: “The applicant’s credit history. Positive credit history will most likely remain on your credit report forever, however derogatory credit typically remains on your report for about seven years, with certain bankruptcies up to 10 years.”
- Capacity: “The applicant’s ability to repay the loan, also known as their debt-to-income ratio.”
- Capital: “The amount of money the applicant has available to them, not necessarily money they will be putting towards the purchase of a home.”
- Collateral: These are any assets you can offer to secure the cost of the loan. Typically, “the home is the security offered.”
- Conditions: The conditions necessary for a loan, might include factors such as an appraisal of the home’s worth, which ties back into the security you can offer the lender, obtaining Homeowner’s Insurance and Flood Certification, which is a government-required document used to determine whether the subject property is located in a flood plain.