A mortgage pre-approval is a letter from a lender stating the size loan you can qualify for based on your finances, including annual income, savings and assets, credit score, employment history, and any outstanding judgments or liens. It shows you are a serious buyer, and gives you an advantage over other buyers who may be interested in the same property.
Getting a pre-approval generally means your loan is contingent only on the appraisal of the home you choose, providing that nothing changes in your financial picture before closing. After you have a home under contract, even with a mortgage pre-approval, though, your loan will still have to go through underwriting, which is a final stage of due diligence before issuing the loan.
A pre-approval gets the mortgage process started. The information you provide during pre-approval is the same as what you will need for your final mortgage application. It helps you get ready to finalize your home loan, so you can close on your new property more quickly.
In order to apply for a pre-approval:
- Review your credit report (get one for free at annualcreditreport.com).
- Fix any errors on your credit report if they don’t look right.
- Gather the last two years of tax returns and proof of income (W2s or pay stubs) for you and anyone else applying for the mortgage.
- If you’re self-employed, you will need two years of business tax returns and your YTD profit and loss statement.
- You need to provide proof of regular income from all sources, including Social Security, child support or government assistance.
- Your down payment money and closing money need to be available and in the bank.
- If the down payment and/or closing funds were gifts to you from others, be ready to explain that with documentation.
- If you’re a renter, put together proof from the last 12 months (such as check copies or receipts) showing that you’ve been on time each month with your rent payments. It would also help to have a written referral from your landlord.
- Have two forms of government identification, such as a driver’s license, Social Security card, or passport.
- Copies of divorce papers or documentation of any legal name changes will be needed, if applicable.
- Gather proof of account balances for IRAs and retirement accounts, in addition to any stock holdings.
- Document any other property that you currently own, including vehicles and real estate.
- Be ready to disclose past financial issues like bankruptcy. Provide a written explanation of what happened and what steps you have taken to correct your situation.
- Protect your credit. Do not apply for new credit cards, make large purchases, cancel any current credit accounts, or ask a creditor to lower your limit. These would all affect your credit score.
Even a pre-approval is not a guarantee that you will be approved for a mortgage loan, but it tells sellers that you are a viable candidate for a mortgage, and gets you one step closer to that new home.