How to get pre-approved for a mortgage

Shopping for a home can be tricky without knowing if you'll qualify for a loan — or how much you might be able to borrow. Mortgage pre-approval takes out the guesswork by determining a home buying budget and the interest rate and monthly payments you can expect. Your lender will review and confirm your financial details and provide a mortgage pre-approval letter that shows real estate agents and sellers you're a serious buyer. 

Here's a quick look at how to get pre-approved for a mortgage, plus tips for ensuring you don't get denied when it's time to close on the loan. 

Mortgage pre-approval vs. pre-qualification

"Mortgage pre-qualification" and "mortgage pre-approval" are sometimes used interchangeably, but they're not the same. While both help you figure out how much house you can afford, pre-approval is more accurate and adds more credibility to your offer. 

Pre-qualification is a less formal (and less reliable) estimate of how much you can afford to spend on a home. You'll provide a basic overview of your finances, but your lender won't ask for substantiating documents, verify the details, or do a credit check. Instead, the lender essentially takes your word for it and offers a ballpark estimate of what you can borrow. 

On the other hand, for a pre-approval, you'll provide information and documents like pay stubs and bank statements so the lender can verify your income and assets. Your lender also pulls your credit report and credit score to evaluate your debts and creditworthiness. (These are typically "hard" credit checks that can temporarily affect your credit score.) Based on this information, the lender determines:

• Whether you qualify for a loan and, if so,

• How much you can borrow and what terms you can expect (e.g., the interest rate and monthly payment).  

While pre-qualification can be a good starting point early in the home buying process, it doesn't carry as much weight as pre-approval — and won't necessarily help you make more competitive offers.  

What you'll need to get pre-approved

The pre-approval process is much like submitting a regular mortgage application, except it doesn't apply to a specific property. You'll submit information, which your lender reviews along with your credit history. Here's a rundown of how to get pre-approved for a mortgage.

Documentation

Your lender must confirm you have enough money to make a down payment and cover your monthly mortgage payments. So, you'll need to substantiate your identity, income, and assets. Be prepared to provide your: 

• Driver's license or passport

• Pay stubs

• W-2s, 1099s, and/or Schedule K-1s

• Income tax returns

• Real estate rental income statements

• Divorce papers (if you use alimony or child support as qualifying income)

• Gift letters (if you're using a gift from a relative to fund your down payment)

• Bank statements

• Brokerage and retirement account statements

Check your credit score

Your lender also needs to understand your debts to calculate your debt-to-income (DTI) ratio, an important metric that compares your monthly debt to your monthly income. The higher your DTI, the more likely you will struggle to repay a mortgage. As such, 43% is often the highest DTI you can have and still qualify for a mortgage. 

Your lender may ask for a detailed list of your monthly debts and authorization to access your credit reports and scores. It's wise to check your credit six to twelve months before applying for a mortgage so you'll have time to clear up any credit issues that could impact your mortgage. You're legally entitled to a free credit report every 12 months from each of the three major consumer reporting companies — and requesting them won't hurt your credit score. To get those free credit reports, go to AnnualCreditReport.com. 

Pre-approval letter

If you're pre-approved, your lender will give you a mortgage pre-approval letter on official letterhead that includes details like the:

• Loan amount

• Loan program

• Interest rate

• Down payment amount

• Expiration date

The letter indicates to real estate agents and sellers that you're a serious buyer with the financial means to buy a home within the specified price range. This helps real estate agents focus on homes within your budget — and not waste time on homes that aren't. Meanwhile, sellers may be more willing to negotiate if they know you already have financing in place since it can help expedite the closing process and ensure the transaction won't fall through due to financing issues. 

How long does a mortgage pre-approval take?

Not surprisingly, the timeline for getting mortgage pre-approval varies by lender. Most lenders typically decide within one to three days, but you might wait up to a month to hear back from some lenders. Lenders specializing in digital loan applications are generally the fastest. Be sure to confirm the lender is doing a pre-approval — not a pre-qualification — since those terms are sometimes used interchangeably. 

Pre-approval letters are usually valid for 30 to 90 days, depending on the lender. After that, you'll have to apply for a new pre-approval letter, which shouldn’t take too long since your lender will already have much of your information on file. Still, it's a good idea to set a calendar reminder to help you keep track of the expiration date; it would be disappointing to find your dream home only to discover your pre-approval is no longer valid. 

Why you might be denied after being pre-approved for a mortgage

Pre-approval can be an advantage (and a comfort) during the homebuying process, but it doesn't guarantee you'll get finally approved for the loan. Anything that significantly alters your financial situation between pre-approval and final loan approval can affect your mortgage eligibility. Here are a few situations when that can happen:

• Your credit score dips below the lender's qualification guidelines

• Your employment status or income changes

• Your debt load increases (for example, you buy a new car or run up a lot of credit card debt)

• The lender's loan requirements or lending guidelines have changed — and they're applied retroactively

• Issues with the appraisal

To help ensure the transition from pre-approved to approved goes smoothly, follow these tips:

• Continue paying your bills on time

• Keep an eye on your credit score

• Avoid opening new lines of credit 

• Avoid taking on new debts

• Maintain your job

• Build your savings to cover your down payment and closing costs comfortably

If your mortgage is denied, ask your lender what happened — and find out if there's a way to fix it. While it might not happen immediately, you'll be better prepared the next time around.

Wrapping up

Pre-approval offers peace of mind and helps make you a more attractive client and buyer. However, mortgage pre-approval letters expire, so getting the timing right is essential. If you get pre-approved too soon, it could expire before you're ready to make an offer; too late, and you could miss an opportunity. Ideally, you'll start the pre-approval process as soon as you're serious about shopping for a new home. That way, you’ll know your budget and be ready to make a strong offer when you find the perfect home. 

This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice. Opendoor always encourages you to reach out to an advisor regarding your own situation.