Besides your closing documents, the most exciting piece of paper you’ll see when home buying is your pre-approval letter. With it in hand, you’ll have a guide for your budget, you can move quickly when you find a great house, and you can make your strongest offer. Mortgage pre-approval isn’t hard—it’s just a step-by-step process that’s even easier when you know exactly what to expect.
1. Understand the difference between pre-approval and pre-qualification.
Getting mortgage pre-approval makes getting a mortgage easier and puts you in a better position as a buyer. Being pre-qualified is more like a small step toward those goals. For pre-qualification, you give a lender a few details about your finances and you receive a general idea of what size mortgage you might be able to get. It’s helpful for planning and browsing, but that’s about it.
The process of getting pre-approved is longer and more involved, but you walk away with a letter from a lender saying you’re highly likely to get a specific mortgage. That tells buyers your offer is serious and that you’ve been vetted.
2. Get your financial life in the best shape possible.
The size and terms of the mortgage you’re pre-approved for are based on a lot of financial factors. If you have some time before applying, these are the primary things you can improve to get the best mortgage terms possible:
- Credit score: Resolve any outstanding issues on your credit report.
- Income: Up for a raise? Or think you deserve one? Now’s the time to ask.
- Debt: Pay down loans, credit cards, or lines of credit as much as you can without draining your savings.
- Savings: Make sure a lender can see that your down payment is ready to go and that you have as much cash on hand as possible.
3. Research mortgage lenders and loan types.
Different mortgage lenders may approve you for different loan terms, so now’s a good time to shop around. Your own bank, a local credit union, or a company that only does mortgage lending can offer different benefits depending on your needs. Experts recommend getting pre-approval from three lenders so you can compare the terms, mortgage payments, and interest rates offered by each. You can use Trulia’s pre-qualification tool to connect with local lenders near you.
This is also a good time to look into different types of mortgage loans you may qualify for, such as fixed-rate, adjustable rate, FHA, VA, and others. Lenders can help you decide which type may be best for you, but knowing what you’re interested in will help you select lenders that offer it.
4. Time it right.
Pre-approval letters expire, often after 60 to 90 days. Before you start the actual application process, make sure you’re not pulling the trigger too early. Make sure to find a real estate agent and be ready to go so you can start your house hunt as soon as you get your pre-approval letter. Reapplying is typically pretty painless, but avoiding it will still save you time.
5. Gather the right financial documents.
Your lenders want to see a picture of your financial life, and they use a bunch of documents as proof of what it looks like. It can take a few days or more to gather them all up, so the more you have on hand when you start to apply, the more time you’ll save. Though certain types of applicants need different documents (like self-employed people or veterans wanting a VA loan), these are the basics:
- Driver’s license or passport (or another form of ID)
- Your W2 tax form
- List of assets, like checking accounts, retirement accounts, etc.
- List of liabilities, like loans or child support
- Any legal declarations, like bankruptcies, liens, divorce decrees, etc.
- Previous bank statements (typically, two months)
- Previous paystubs (typically, one month)
- Previous tax returns (typically, two years)
- Gift letters explaining any significant monetary gifts
6. Apply for pre-approval.
Every lender will have slightly different forms and processes, but this part is pretty self-explanatory. Follow the directions, and once you have all your documents submitted, you should hear back in a few days. If you get a mortgage pre-approval (yay!), remember, it will expire, so it’s time to start your home buying adventure.
7. Avoid big financial changes while shopping.
While you’re looking for the right home, your biggest goal should be to keep your financial life stable because you have not yet secured your actual mortgage—that comes after you make an offer and it’s accepted.
If nothing changes, you should feel pretty secure about your full mortgage application being approved and you can move toward closing on your house.
But if you take out new credit cards, change jobs, or anything else, the lender will review your application with your new financial situation in mind.
Now that you’ve achieved your first financial success in your home-buying journey, it’s a good time to think about your next smart-money move: Buying a house that will go up in value. Here’s how to tell if a house will appreciate.