Mortgage Pre-approval: What Is It and Why Does It Matter?
Getting pre-approved for a mortgage is the first big step to buying or building a home.
If you’ve ever begun the house hunting process, you’ve likely come face to face with the concept of mortgage pre-approval. Here’s how it works.
What is mortgage pre-approval?
A mortgage pre-approval is a lender’s way of offering to lend you a particular amount of money. While it’s as close as you can get to a sure thing, it’s not quite — nothing is really set in stone until you’re involved in a purchase contract, and things can still change all the way up until closing.
When you get pre-approved for a mortgage, you’ll receive a letter from the lender that confirms what they’ll lend you. Letters like this can be used in the offer and negotiation process.
Pre-approval is sometimes confused with prequalification. While similar, prequalification is a less formal and less involved step to financing a home build or purchase. Whereas pre-approval will involve an in-depth application and follow-ups from the lender on various aspects of your finances, prequalification will mostly be based on the information you provide. Since it doesn’t require as many details or as much proof, prequalification works more like an estimate than an actual offer. It’s helpful information as you begin to look into lots or homes, but it doesn’t give you any actionable bargaining power yet!
What are the steps to pre-approval?
1. Choose a lender
Different lenders will lend varying amounts and offer different mortgage rates. It’s important to get a solid reference from your realtor or another expert helping you through your real estate journey. While shopping around for a lender, finding out the details of your prequalification from each lender can be a helpful step to choosing which one, and which type of mortgage, is right for you. This step might come back up in another part of your timeline, since the result of the pre-approval process will sometimes show you that it’s still worth shopping around with other lenders.
2. Determine your timeline
Find the ideal time to begin your pre-approval application. Being an in-depth process, it’s a good idea to get it started a few weeks before you’d want to make an offer. Some people go through the mortgage pre-approval process especially early on purpose, so that they can get an accurate view of their borrowing ability and address any items bringing down their credit score. At the same time, a pre-approval letter will only remain valid for 60-90 days, so if you’ve got a clear view of your financial situation and know you’ll be approved, timing your pre-approval application close to when you’ll be ready to make offers will help you avoid needing to re-apply.
When building out your timeline, also take into consideration any large purchases or new debts that you expect. Between pre-approval and closing on a home, if any big changes like a change in employment or a large purchase take place, the terms of the loan can change — a pre-approval is not a guarantee.
3. Gather documentation
To speed up the process, get documents together and ready to submit with your application. In addition to providing your social security number so the lender can do a hard credit pull, you’ll need to submit bank statements, pay stubs, tax documents, and other situation-specific forms in order to give the lender a full view of your debt to income ratio, loan to value ratio, and credit history.
4. Complete the application
Once you’ve got everything together, time to submit! Each lender will have different systems for submitting application materials, like secure file exchange programs online. Know in advance that your credit may be impacted by the hard credit pull that the lender performs.
After the application is complete and you have your pre-approval letter, you’re ready to make offers on homes or lots! If the numbers you see on your pre-approval letter don’t align with what you’d expected, you can also complete the same process with other lenders. Pre-approval does not lock you in to work with that lender, nor does it mean the lender has to go through with the mortgage if your financial situation changes.
5. Make offers!
Once you’re happy with your pre-approval and have found a lender and mortgage type that’s right for you, you’re ready to hit the market and begin making offers on lots or homes! Consider not only your mortgage limit but also your monthly budget in order to determine how much you’re comfortable spending on a house before you begin the process.
Key takeaways
With the right experts at your side to guide you and give you solid referrals, and a bit of extra runway time to shop around, finding a lender and mortgage type that’s right for you is a matter of time and following the process.
The most important thing to know about mortgage pre-approval is that it should be done very early on in the home building or house hunting process! Without this step, it’s easy to overcommit and get buried in other plans that simply won’t work out financially. Knowing up-front what your buying power and budget looks like will help you purchase, or better yet, plan and build, a home that is truly right for you and your family, within a comfortable budget.
With Atmos, home building has never been simpler. Work with experts at every step to stay true to your budget while prioritizing your ideal lifestyle.
Ready to begin your homebuilding journey? Get started with Atmos today.
