If you’re in the market for a new home, chances are you’ve come across the term “mortgage pre-approval.” It is important to understand what a mortgage pre-approval is and the steps necessary to get one if you want to purchase a home. You’ll find all the information you in this comprehensive pre-approval guide

What is a Mortgage Pre-Approval?

what is mortgage pre-approval

A mortgage pre-approval is issued by a lender, bank, or another financial institution. It involves looking at your credit history, income, financial information, and a few other factors to determine the kind of home you can afford.

Having a mortgage pre-approval letter in hand means that the lender is willing to offer you a loan in the amount stated. In many cases, this mortgage pre-approval letter is only valid for a specific time frame.

The Importance of a Mortgage Pre-Approval

the importance of mortgage pre-approval

Mortgage approval letters are important for many reasons. Having one in your possession means that you have undergone the necessary process outlined by your lender.

The result is that a lender is confident that you can repay the loan based on the information you gave them. You’ll enjoy the following advantages of having one:

Real estate agents

As a busy professional, your real estate agent wants to make that you are serious about purchasing a new home.

One of the best ways of demonstrating this commitment is to arrive at your first meeting with a copy of a mortgage pre-approval letter. Today, many real estate professionals hesitate to work with potential home buyers unless they come equipped with a mortgage pre-approval letter.


The housing market is improving across the country. Depending on the area you want to move to, you could find that there is competition for homes located in desirable neighborhoods.

A seller might have several offers on the table. Yours will stand out from the crowd because of the attractive mortgage pre-approval letter included with it.

Check for mistakes

Since your credit history will be checked by the lender — which typically doesn’t make much of a hit on your score unless you apply for several loans over a few days — this is the perfect time for you to obtain a free copy of what they are seeing.

The primary reason for this is so you can note any errors or discrepancies and correct them. Depending on the type of error, you might be able to get them cleared up before you apply for your mortgage. At the very least, you can inform your lender that you are in the process of addressing them. In case you need to raise your credit score, follow this guide.

Your budget is clear

By being pre-approved for a mortgage, you’ll know what kind of home you can finance and what your monthly payments will look like. At this stage of the home buying process, knowing what your budget will look like is important.

You can save valuable time by focusing on homes within your price range.

Knowing the amount of your monthly payment enables you to predict your budget. For example, that fixer-upper that seems like a good bargain now might need major improvements in five years. You can use that information to determine if the home will fit into your budget.

Process of Obtaining a Mortgage Pre-Approval

the process of mortgage pre-approval
When you begin the process of obtaining a mortgage pre-approval, be prepared to gather a few pieces of financial information. While the pre-approval process is not immediate, most lenders can get back to you within 24-48 hours. Because you’ll need much of the same information when you apply for a mortgage, a pre-approval is a good way to see if you’re ready.

1. Assets Statement

One of the most important pieces of information that your mortgage pre-approval hinges on is your ability to pay the closing costs and make a down payment. You also need to have enough cash reserves to meet their lending formula.

Your lender will need to see copies of your most recent bank statements along with any investment accounts that you might have. Just for perspective, a conventional mortgage typically requires a down payment between 10-20%. In contrast, an FHA loan might require a down payment of only 3.5%.

2. Income Statement

Knowing your current (and past) income provides the lender with some indication of whether you have the money to pay your mortgage payments on time throughout the life of the loan.

Today, there are hardly any lenders that issue mortgage pre-approval letters without documentation or verification from a third party. Before you apply for a mortgage pre-approval, make sure to gather together your tax forms and W-2 statements from the past two years.

You’ll also need recent pay stubs that not only show your current income, but your income as of that date and any other kind of income — including, but not limited to — bonuses and alimony.

3. Verification of Employment

In addition to the above information regarding your employment, your lender will likely want to contact your employer directly.

Some questions that you can expect your employer to be asked by your lender include whether you are still employed with that company and your exact salary. If you have changed jobs recently, your lender will likely need to invest in a bit of extra legwork to determine your eligibility.

This most often involves contacting your former employer. If you are self-employed, be prepared to provide a significant amount of documentation and paperwork concerning your business and income. Your lender wants to make sure that you are not a risk before agreeing to a mortgage pre-approval letter.

4. Legal Documents

Several forms of documentation will be required by your lender. In addition to obtaining copies of both your driver’s license and social security number so that your credit report can be pulled, they might ask for other legal documentation to verify unclear information.

5. Your Credit Report

Your credit report is a document that your lender uses to base your interest rate on. Those home buyers with an excellent credit score — generally agreed to be 740 and above — are rewarded with the lowest interest rates. Lenders that work with FHA loans typically want to see that you have a credit score of at least 620.

If your credit score is below 580, you can expect higher interest rates. It is also likely that you’ll need more money for a down payment. Many lenders try to work with their clients so they can boost their credit scores. (Guide on Credit Repair)

Do You Need a Mortgage Pre-Approval?

do you need a mortgage pre-approval

In one word — yes! Mortgage pre-approvals provide you with a lot of good information when it comes to purchasing a home. Once you know where you stand with your lender, you can focus on the search for a home.

You’ll also be able to present a rock-solid offer to the seller and demonstrate your sincerity to a real estate professional. While a mortgage pre-approval is not a guarantee that your lender will provide you with a loan, it is a great start to a healthy relationship with your lender.

If you’d like to get pre-approved for a mortgage today, fill out an application with Neighborhood Loans here.

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*Pre-approvals are offered by Neighborhood Loans to clients that voluntarily provide the required documentation. Neighborhood Loans also offers pre-qualification options that require no documentation. This information pertains to pre-qualification, pre-approval processes only. Actual loan applications require standard documentation.