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You’ve made the big decision: You’re ready to buy a home! What’s next? A great first step is to receive a mortgage pre-approval. What is a pre-approval, what are its benefits and how can you get one? Read on to learn all about this important piece of the home purchasing and financing process.
Understanding Mortgage Pre-Approval
If you’re like most homebuyers, you will be looking to finance your new home. But perhaps you’re not sure how much you’ll be able to borrow. This is where a pre-approval comes in.
A pre-approval is a lender’s written verification of your eligibility for a loan for a specific amount based on your current financial circumstances. It’s a good faith estimate of the amount you’ll likely be able to borrow.
The pre-approved amount depends on factors like your financial stability and whether the property itself meets the lender’s criteria. While a pre-approval is a good indicator of your borrowing power, it's not a final guarantee of loan approval. Your loan is only considered finalized once the lender completes a full underwriting process after you've found a home.
Pre-Qualification vs. Pre-Approval
Pre-qualification and pre-approval are sometimes used interchangeably. While both help you estimate your potential loan amount, there’s a difference between these two terms.
Pre-qualification involves a relatively informal review of your finances, often based on self-reported information. It provides a rough idea of the mortgage amount you may qualify for.
Pre-approval, on the other hand, involves a thorough verification of your financial documents and credit, giving you a more accurate picture and a stronger advantage when making an offer.
The Benefits of Receiving a Mortgage Pre-Approval
Obtaining a pre-approval has many benefits that can help facilitate the home-buying process and make it a more positive experience.
Enjoy Peace of Mind as You Shop for a Home
A pre-approval identifies the loan amount you would likely qualify for so you can limit your search to homes that fit your budget. You can avoid looking and falling in love with homes out of your price range.
And remember, just because you’re pre-approved for a certain dollar amount doesn’t mean you have to borrow the entire sum. You’ll also want to consider other expenses associated with homeownership, such as taxes, association dues and new home furnishings, so leaving some wiggle room in your monthly budget could be useful.
Get Ahead of Competing Buyers
Many sellers prioritize accepting offers from potential buyers who have been pre-approved over those who are only pre-qualified. It shows that you’re a serious, credible home buyer who can secure adequate funding to proceed with the purchase.
Move Faster on Your Offer
Found a perfect home? Since you already know what you can afford, you can make an offer immediately — a big plus in a competitive market.
Expedite Loan Processing
Since you’ve already submitted the majority of the documentation and information you’ll need for the mortgage, your loan process may be smoother and faster.
Pre-Approval vs. Conditional Approval vs. Final Approval
The mortgage process includes a few distinct approval stages. Let’s break down the most common:
Pre-approval: Pre-approval happens early in the home-buying timeline, often before you have even found a home. It’s your lender's initial estimate of what you can borrow based on a review of your finances. A pre-approval is helpful for house hunting and financial planning, but it's not a guarantee.
Conditional approval: Once you find a home and officially apply for a mortgage, underwriters review your application and may issue a "conditional approval." This means they'll likely approve your loan, but you'll need to provide additional information or meet specific requirements first. Conditional approval requires verification of your income, assets, debt, proof of homeowners insurance and other documentation.
Final approval: Final approval, also known as full or verified approval, is the last stage in getting a mortgage. It occurs after you meet all the criteria of your conditional approval. The lender reviews all the documents and information, and if everything is in order, they will officially approve your loan, allowing you to close on your new home.
Preparing for Your Pre-Approval
Proper preparation for your pre-approval can help set you up for success. Here are some things you can do as you get ready to begin your home search.
Check Your Credit
Request your credit reports from all three major bureaus (Equifax, TransUnion, and Experian) and review them carefully. If necessary, consider taking steps to improve your credit score, like paying down debts and consistently making on-time payments. Dispute any errors you find. To request your free credit reports, visit AnnualCreditReport.com.
Evaluate Your Savings
Determine how much you have available for a down payment and closing costs. Remember, closing costs can add up to 2-5% of the home's purchase price. If you're receiving gift funds, ensure you have the necessary documentation.
Create a Realistic Budget
Analyze your income and expenses to establish a comfortable monthly mortgage payment. Use an online mortgage calculator to explore different scenarios and understand how factors like interest rates and loan terms impact your payments.
Educate Yourself
Familiarize yourself with common real estate and mortgage terminology. Research different loan types, interest rates and terms to make informed decisions during the pre-approval process.
Gather Your Documents
Be prepared to provide your lender with proof of income, assets and debts. This typically includes recent pay stubs, bank statements, tax returns and asset statements.
Choosing the Right Lender for Your Loan
After assessing your credit, savings and budget, it’s time to choose a lender and begin the pre-approval process. Consider the following as you start to compare lenders:
- Interest rates, as even slight differences can significantly impact your total costs of borrowing
- Loan options that fit your financial situation, such as conventional fixed-rate loans, adjustable-rate mortgages (ARMs), jumbo mortgages, FHA and VA loans
- The lender’s industry reputation and customer service
- Origination fees and discount points — don’t hesitate to negotiate these since some lenders may be willing to reduce certain fees or offer other concessions
- The ability to lock a rate before locating a property
- For example, Pennymac’s Lock & Shop program1 allows homebuyers with a Pre-Approval from Pennymac to lock their rate prior to entering a purchase contract with a seller. If rates go down after you lock, you’ll have the option to reduce to the lower rate. Depending on market fluctuations, this move could potentially save you thousands of dollars on the lifetime cost of your mortgage.
The Pre-Approval Process
You've checked your credit, assembled your documents and settled on a lender. Now, let's kick-start your pre-approval process with these steps:
- Complete a mortgage application with a lender. A Pennymac Loan Expert can guide you through the entire experience.
- Submit documents that will provide an overview of your finances. Required documents will vary by lender but typically include:
- Recent pay stubs
- W-2 forms and 1099 statements
- Bank statements
- Statements for other assets, such as stocks, bonds, IRAs and 401ks
- Additional documents related to income, like child or spousal support, rental property income or gift funds
- The underwriter will review your documents, credit history, income and debt-to-income (DTI) ratio. They will also consider the type of property you’re planning to purchase.
- Upon your lender’s review, you’ll receive a pre-approval confirming you’re likely to be able to borrow a designated amount, as long as the property you eventually want to finance is eligible and certain conditions are met.
- While it’s not a loan finalization, it is a significant move in that direction.
- Begin your house hunting with confidence! You’ll know exactly which homes fit your budget and be ready to make an offer.
After Pre-Approval: Considerations to Keep in Mind
After receiving your pre-approval, it's important to maintain stability in your financial situation. This helps ensure your pre-approval remains valid as you progress through the underwriting and closing process.
Continue Good Credit Habits
Your pre-approval is based on your current financial circumstances and credit score. Avoid incurring new debts, applying for new credit cards or co-signing for any loans. Be sure to keep paying all your bills on time. You want your lender to be confident of your creditworthiness.
Keep Up Your Savings
Refrain from withdrawing funds earmarked for your down payment, closing costs or other new home expenses. Keep saving as much as possible.
Avoid Job Switches
Maintain your current employment, as any changes could potentially affect your income stability.
Be Transparent With Your Lender
If you experience any changes that could impact your financial situation, be upfront with your lender. Your lender may be able to reassess and potentially adjust your loan terms before you get too deep into the home-buying process.
Pre-Approval FAQs
Could a Pre-Approval Impact Your Credit Score?
A pre-approval typically involves a hard credit inquiry, which may temporarily lower your credit score. However, if you apply for a pre-approval with several lenders within a short amount of time, it’s typically considered a single inquiry on your credit report.
Do Pre-Approvals Expire?
Yes. A Pre-approval usually has a limited validity period, often ranging from 60 to 120 days (A Pre-Approval from Pennymac is good for 120 days). And if you don’t find a home within that set period, you’ll likely have an option to extend or renew it . You’ll want to discuss pre-approval extension options with your lender.
Why Might Your Pre-Approval Not Lead to a Final Mortgage?
Some factors that could affect your pre-approval before loan finalization include:
- Changes to your financial situation, such as employment loss and major changes to your credit score
- Inaccurate information on documents or an incorrect initial assessment of your finances
- Property issues, like significant problems uncovered during the home inspection, low appraisal value or zoning issues
From Pre-Approval to Your Perfect Home
With this important calling card in hand, you can shop for your new home with confidence. If you’re ready to embark on your own home-buying journey, set yourself up for success with a Pre-Approval from Pennymac. Connect with a Pennymac Loan Expert today to get started.
1 Lock & Shop Program allows consumers with a purchase mortgage Pre-Approval from Pennymac to lock a rate prior to locating a property. The program requires a non-refundable fee of $595 due at the time of the rate lock. Consumers with a purchase mortgage Pre-Approval from Pennymac must meet appropriate underwriting conditions to obtain a mortgage loan. Consumers may choose between a 60-day, 75-day or 90-day lock period. Consumers must initiate a mortgage loan application for a specific property and be under purchase contract for the property at least 30 days prior to lock expiration in order to extend the locked rate. All rate lock extensions are subject to Pennymac’s standard rate lock extension fees. After the rate lock and subject to favorable market conditions, consumers may be eligible for a one-time reduction in rate once the loan application for a specific property has been initiated (0.50 % maximum reduction in interest rate allowed). Eligible loan products are Conventional Fixed, Conventional ARM, FHA Fixed and VA Fixed. Program excludes Jumbo, refinance, third-party and in-process loans. Program subject to termination in Pennymac’s sole discretion and without notice.
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Meet Our Contributing Editors
Bradley Thompson and Afton Lambert are Contributing Editors for Pennymac’s consumer content and are exemplary leaders within the mortgage industry space. Both experts take pride in helping our customers achieve and sustain their aspirations of home.
For over 13 years, Bradley has achieved success as a high performer in various leadership roles including consumer direct sales and mortgage fulfillment positions.
With over 10 years of mortgage experience, Afton started her career as a top performing Loan Officer, before transitioning into her leadership role, where she has recruited, hired and trained Loan Officers.
