How to Get Pre-Approved for a Mortgage

Lenders use both terms, and not always consistently, so ask what any letter is actually based on.

A pre-approval is still conditional. The lender has reviewed you, the borrower, but not yet the home. Final approval depends on the property, the appraisal, the title and anything that changes in your finances before closing. Some lenders offer a fuller upfront review, in which an underwriter signs off on your file before you find a home. It can make an offer more competitive, but names and terms vary by lender.

Get pre-approved once you have a realistic budget and are ready to tour seriously. If you have not yet worked out what you are comfortable paying, start with how much house you can afford.

Lenders verify the three things that decide whether you can repay: income, assets and debts. Requirements differ by lender and mortgage program, but expect to be asked for:

• Identity: government-issued photo ID and your Social Security number, so the lender can pull credit.
• Income: recent pay stubs, W-2s for the past two years and, often, federal tax returns. Lenders may also confirm employment directly with your employer.
• Self-employment or variable income: typically two years of personal and business tax returns, and possibly a year-to-date profit and loss statement. Commission, bonus and overtime income may need a track record before a lender will count it.
• Assets: recent statements, often the last two months, for checking, savings, investment and retirement accounts, showing the money for your down payment and closing costs.
• Gift letters: if a relative is giving you money toward the purchase, a signed letter stating it is a gift rather than a loan, plus a record of the transfer.
• Other situations: divorce decrees, child support or alimony orders, bankruptcy discharge papers, leases for rental income or VA eligibility documents, where they apply.

Expect questions about any large deposit that is not your regular pay. Lenders need to know where money came from, so keep the paper trail for transfers between your own accounts, sales of personal property and cash deposits. Moving money around shortly before you apply tends to create more questions, not fewer.

With your permission, the lender pulls your credit reports, often from all three major bureaus. Your scores affect which loan programs you qualify for and the rate and fees you are offered. Lenders also read the reports themselves, looking at late payments, collections, past bankruptcies or foreclosures, and how much of your available credit you are using.

Your monthly debts are measured against your gross income using your debt-to-income ratio; the debt-to-income calculator shows where you stand. Conventional, FHA, VA and USDA loans each set their own credit and debt standards, and individual lenders can add stricter rules of their own. Minimum scores and down payments change over time, so ask lenders directly rather than relying on a figure you read elsewhere.

Program choice also affects your monthly cost. A conventional loan with a small down payment usually means private mortgage insurance, while FHA loans carry their own mortgage insurance premiums. Ask your lender to show the options side by side.

If you want to correct report errors or pay down balances first, the guide to checking your finances before you buy covers that preparation.

Rates and fees can differ between lenders for the same borrower, so it is worth getting more than one quote. Banks, credit unions, online lenders and mortgage brokers can all issue pre-approvals. A direct lender lends its own money, while a broker compares offers from several lenders on your behalf and is paid by you or the lender. Either can work well. Ask any lender or broker for its NMLS number, which you can look up in the Nationwide Multistate Licensing System to confirm it is licensed in your state.

Once you apply, each lender must give you a Loan Estimate within three business days. It is a standard federal form, which makes side-by-side comparison easier. To compare fairly:

• Request quotes on the same day, for the same loan type, amount, term and down payment, because rates move daily.
• Compare the interest rate together with points and lender fees, not the rate alone.
• Check the APR, which folds certain costs into one rate but assumes you keep the loan for its full term.
• Ask how long a rate lock lasts, what it costs and what happens if closing is delayed past it.

Credit scoring models generally treat several mortgage inquiries within a short window as a single inquiry, though the length of the window depends on the model. Keeping your shopping within a few weeks limits the effect.

Service matters as well as price. A lender that answers quickly, explains its conditions clearly and closes on time can be worth as much as a small difference in rate, particularly when your contract has a tight financing deadline.

A pre-approval letter usually states the maximum loan or purchase price, the loan type, sometimes the down payment assumed, the conditions still to be met and an expiration date. Read the conditions: they tell you what the lender still needs, such as a satisfactory appraisal or proof that your current home has sold.

Letters are valid for a limited period, commonly somewhere between 30 and 90 days depending on the lender, because pay stubs, statements and credit reports go out of date. If your search takes longer, the lender will ask for updated documents and may pull credit again before reissuing the letter.

Your agent will usually send the letter with each offer, and many lenders will issue one for the specific price you are offering rather than your maximum. A pre-approval shows you can likely borrow; it does not show you have the cash to close. For how pre-approval letters, proof of funds and other documents fit together, see documenting your funds for an offer. Banks selling foreclosed homes often set their own rules, covered in proof of funds and pre-approval for REO offers.

Between pre-approval and closing, the lender verifies everything again. Lenders commonly re-check employment shortly before closing and may pull credit again, so the weeks after your letter is issued are not the time for financial changes. Things that can reduce or cancel an approval include:

• New debt, such as a car loan, a new credit card or financed furniture, which raises your debt-to-income ratio.
• Job changes, including a new employer, a move to commission or self-employment, or a gap in work.
• Undocumented money movements, such as large deposits or withdrawals you cannot explain.
• Missed payments or new collections that lower your score.
• Rate changes before you lock, which can push the payment and your ratios higher on the same loan amount.
• The property itself, such as a low appraisal, a condition problem, a condo project the lender will not approve or a title issue.

If something changes, tell your lender first. A planned change, such as a new job in the same field, may be manageable if the lender knows in advance. Once you are under contract, the underwriter takes your file through final approval; inspection, appraisal and underwriting explains that stage.