What Getting Pre-Approved Involves

A pre-approval is a lender’s written statement that, based on a review of your finances, it expects to lend you up to a certain amount on certain terms. Sellers and their agents often want to see one before they take an offer seriously. Week four of the plan is about knowing what the process involves, so you can walk in prepared.

Prequalification vs. pre-approval

Lenders do not all use these terms the same way, so always ask what a letter is based on. In general:

• Prequalification is often a quick estimate based on information you provide about your income, debts and savings, sometimes with a credit check and sometimes without.
• Pre-approval usually goes further. The lender checks your credit and reviews documents such as pay stubs, tax forms and bank statements before issuing a letter.

Because it relies on verified information, a pre-approval is generally the stronger signal to sellers, and it gives you a more reliable sense of what is realistic.

What lenders review

Credit history and scores

Your credit reports show how you have managed debt. Your scores, together with the loan type and your down payment, influence whether you qualify and the interest rate you are offered. This is why the plan starts with credit in week one.

Income and employment

Lenders want to see income that is stable and likely to continue. They commonly look at your recent history, often two years, and may ask questions about job changes, gaps or income that varies. Self-employed borrowers should expect to provide more paperwork, typically including business and personal tax returns.

Debts and your debt-to-income ratio

Your debt-to-income ratio, or DTI, compares your monthly debt payments with your gross monthly income. As an illustration, if your income before taxes is $6,000 a month and your debt payments, including the estimated new housing payment, would total $2,400, your DTI would be 40 percent. Each loan program and lender sets its own limits.

Assets

Lenders verify the money you plan to use for the down payment and closing costs, and some also want to see reserves left over after closing.

Documents to gather

Requirements vary, but most lenders will ask for some version of this list:

• A government-issued photo ID
• Pay stubs covering about the last 30 days
• W-2 forms, or 1099 forms, from the past two years
• Federal tax returns from the past two years, especially if you are self-employed or earn commissions
• All pages of your most recent bank and investment statements, usually two months
• Details of your current debts and monthly payments
• Documentation of any other income you want counted
• A gift letter, if someone is helping with your down payment
• Written explanations for employment gaps or large deposits, if the lender asks

Shopping lenders without harming your credit

Getting quotes from more than one lender is one of the most effective ways to understand your options. Consider a mix: a bank, a credit union, a mortgage company or a mortgage broker.

Credit scoring models generally treat several mortgage credit checks within a short window as a single inquiry, because they recognize you are shopping for one loan. Depending on the model, that window is often between 14 and 45 days, so keep your comparison shopping focused. When you compare offers, look at the Loan Estimates rather than advertised rates, and pay attention to points, lender fees and the APR.

After the letter: protecting your pre-approval

Pre-approval letters usually carry an expiration date, often 30 to 60 days out, and may need updated documents to be renewed. Until your loan closes, the lender can review your credit and employment again, so keep things steady:

• Avoid opening new credit cards or taking out new loans, including for furniture or a car.
• Keep paying every bill on time.
• Talk to your lender before changing jobs or moving large sums of money.
• Do not co-sign a loan for anyone else.

Once you have a signed purchase contract, the lender moves toward final approval. That typically includes an appraisal of the home, a title review, verification of your documents and often a final employment check shortly before closing.

If the answer is no, or less than you hoped

Ask the lender to explain why. If you are turned down, federal law generally requires the lender to tell you the reasons or how to request them. If the decision was based on information in your credit report, you are entitled to a free copy of that report if you request it within 60 days. That information becomes the starting point for your next 30 days.