How to Get Pre-Approved for a Mortgage, Step by Step

A pre-approval is a letter from a mortgage lender saying how much it’s generally willing to lend you, after looking at your credit and your finances. It’s usually the first real step of buying a home, and it’s less scary than it sounds.

Before I bought my own home, I researched, asked a lot of questions and took a homebuyer class. Here’s what I want you to know on day one.

Pre-qualification vs. pre-approval

You’ll hear both words. The Consumer Financial Protection Bureau (CFPB) says lenders don’t use them the same way:

• Some lenders pre-qualify you based on information you tell them, without checking it, and pre-approve you only after they verify it.
• And what one lender calls a pre-qualification letter, another lender may call a pre-approval.

So don’t focus on the label. Ask the lender what it actually checked. Either way, neither letter is a guaranteed loan offer.

The CFPB also suggests getting pre-approved early. If there’s a problem on your credit report, you find out while there’s still time to fix it.

Why sellers want to see a pre-approval letter

When you make an offer, the seller wants to know you can actually get the loan. A pre-approval letter shows that a lender has already reviewed your finances. The CFPB notes that it gives the seller confidence that you’ll be able to get financing.

Not sure your letter is strong enough? Show it to me before we write an offer. The CFPB recommends asking a local real estate agent or a housing counselor exactly that.

What lenders look at

Every lender and loan program has its own rules, but most look at the same four things:

• Credit. Your credit score and history. Getting pre-approved usually means a hard inquiry, a credit check that shows up on your report. According to myFICO, for most people one inquiry takes fewer than five points off their FICO® Scores.
• Income and work. How much you earn and how steady it is.
• Debt-to-income ratio (DTI). All your monthly debt payments divided by your gross monthly income (before taxes). In the CFPB’s example, $2,000 a month in debt payments with $6,000 a month in gross income is a DTI of 33%. Different lenders and loans have different DTI limits.
• Savings and other money. Money for your down payment and closing costs, and what you’d have left afterward.

Want to check your credit before you start? You can get free credit reports from Equifax, Experian and TransUnion every week at AnnualCreditReport.com, according to the FTC. My credit guide explains what to look for.

Documents to gather

Every lender asks for slightly different things, but Experian’s list is a good place to start:

• Government-issued photo ID and your Social Security card
• Recent pay stubs (Experian mentions the last eight weeks)
• W-2s or 1099s and the last two years of tax returns
• Summaries of your checking, savings, retirement and investment accounts
• A list of your debts: credit cards and auto, student and personal loans
• Proof of on-time rent for the last 12 months (the lender may look at your bank statements or ask for your landlord’s contact information)
• A gift letter, signed by you and the person giving you the money, if any part of your down payment is a gift

If you’re self-employed, expect to show more, such as a year-to-date profit and loss statement and business bank statements.

Shopping more than one lender

Comparing lenders is smart, and it doesn’t have to hurt your credit much. The CFPB says that within a 45-day window, multiple credit checks from mortgage lenders are recorded as a single inquiry, because lenders can tell you’re only buying one home.

One detail: myFICO explains that newer FICO® Score versions use a 45-day window, but older versions use any 14-day span, and each lender chooses which version it uses. A simple way to stay inside both windows is to do your comparing within 14 days.

Careful with other credit, though. The CFPB says applying for a credit card, a car loan or another kind of loan adds a separate inquiry that can lower your scores, so it suggests avoiding new credit right before and during the mortgage process.

The Loan Estimate: your best comparison tool

A Loan Estimate is a three-page form that shows a loan’s estimated interest rate, monthly payment and total closing costs. All lenders must use the same standard form, which makes side-by-side comparison much easier.

What the CFPB says about it:

• A lender has to give you one once you share six things: your name, your income, your Social Security number (so it can pull your credit), the property address, an estimate of the home’s value, and the loan amount you want.
• The lender must send it within three business days of receiving your application. Allow a few extra days if it comes by mail.
• The only fee a lender can charge before you get it is a credit report fee, typically less than $30.
• A Loan Estimate is not an approval or a denial.

The CFPB suggests requesting Loan Estimates from several lenders so you can compare offers. One of my own rules is “Never rely on verbal promises: make sure everything is in writing.” The Loan Estimate is that writing. My guide to closing costs in Georgia walks through the costs you’ll see on it.

How long a pre-approval lasts

According to Experian, most pre-approvals are good for 60 to 90 days, and some lenders set limits as short as 30 days. The date is on your letter. If it expires, you may not need a full new application, but the lender may ask for updated documents, such as new bank statements, and you’ll likely need another credit check.

Until you close, talk to your lender before you apply for new credit, change jobs or make any other big financial change. Experian warns that if your situation changes significantly, it could threaten your eligibility.

Your pre-approval amount is not your budget

A lender may approve you for more than you’re comfortable paying each month. Your budget is what decides if a payment works, not the number on the letter. Think about your other monthly costs and what you want to keep in savings.

If you hope to use down payment assistance like Georgia Dream, ask each lender whether it participates. Georgia’s Department of Community Affairs (DCA) publishes a list of participating lenders, or you can call 800-359-4663. My down payment assistance guide explains the programs.

Your next step

Don’t rush. The right house is worth waiting for, and getting pre-approved is how you start on solid ground.

• See where pre-approval fits in my Gwinnett home buyer roadmap.
• Answer six quick questions in my First Home Plan to see your next steps.
• Have a question about your letter? Contact me, in English or Spanish.

This is general information, not financial or legal advice. Every lender and loan program has its own rules, so confirm the details with a licensed lender.