Why You Need A Mortgage Pre-approval

If you’re ready to begin your home shopping journey, make sure you get a mortgage pre-approval first.

A mortgage pre-approval letter is an essential step in the homebuying process. Without pre-approval, it might be difficult to determine your budget. Plus, you risk not being taken seriously by sellers — especially in a highly competitive real estate market.

Below, CNBC Select breaks down how a mortgage pre-approval works and when you want to get one.

A mortgage pre-approval is a document from a lender conditionally offering you a mortgage and containing its terms, such as the loan amount, monthly payments and interest rate. This is a lender’s promise that unless your financial situation changes by the time of purchase, you’ll be approved under the outlined terms.

Mortgage lenders have different timelines for how long it takes to issue a pre-approval. For example, Ally Bank and Better.com Mortgage can process your pre-approval online in minutes. PNC Bank advertises pre-approval in as little as half an hour. Some lenders, however, may take up to 10 days to pre-approve you.

Your pre-approval letter’s expiration date can also vary by lender, but most allow you 30 to 90 days to shop for a home and officially apply for a mortgage.

You want to get a mortgage pre-approval at the beginning of your homebuying journey for two reasons:

That’s the best way to learn your maximum loan amount

While you can estimate how much house you can afford using an online calculator or by pre-qualifying, a pre-approval will give you the most accurate number. This way, you’ll know your price range and what houses you can actually afford. Discovering a lender is willing to part with less money than you had hoped is always a disappointment, but at least it allows you to take stock of your finances or save more for a down payment before proceeding further in the homebuying experience.

Since pre-approval is a much more rigorous process than pre-qualification, you want to have all your ducks in a row before applying.

First, check your credit score as it will play a big part in the lender’s decision. You can use a credit monitoring service from your credit card issuer, such as CreditWise® from Capital One. You can also check your credit by using a free service from Experian — Experian free credit monitoring. The higher credit score you have, the better the terms you’ll receive on a mortgage.

You won’t see the exact score your lender will be checking as mortgage lenders use scoring models not readily available to the public. Still, it will give you a good idea of what you’re working with.

Next, prepare the documents that will show lenders your debt, income, assets and other aspects of your personal finances. While every lender has different requirements, having the following in hand is a good starting point:

• At least two most recent pay stubs
• Tax returns from the past two years
• Bank statements from the last 60 days
• Employment verification documents
• Employer contact information
• List of your debts
• Investment account statements, including 401(k) and IRA
• Proof of rental payments or landlord contact information
• Gift letters (if you’ve been gifted money for your down payment)

It’s best to have all your paperwork ready before you apply — this will save you time on the back-and-forth with the lender.

A mortgage pre-approval can help you gauge how much mortgage you can afford and position yourself as a serious homebuyer. It’s a good idea to apply for pre-approval at the beginning of your homebuying journey — or even better, apply with several lenders to ensure you get the lowest interest rate you can.

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