Mortgage Daily

Published On: December 7, 2020

A mortgage pre-approval letter can be extremely helpful when buying a home. It shows the seller that you are serious about buying their home and that you have been approved for a mortgage. In this blog post, we will discuss how to get a mortgage pre-approval letter and what it means for you.

What is a pre-approval letter?

A mortgage pre-approval letter is a letter from a lender that indicates how much money you are eligible to borrow for a mortgage.

The letter is based on your income, employment history, and credit score.

A pre-approved mortgage letter will spell out how much you’re qualified to borrow, your proposed down payment, and the type of loan program that will be used. The mortgage lender is likely to approve once you officially apply for a mortgage down the road. 

Once you are officially pre-approved, the lender can either mail or email the letter and you can start to provide it to sellers.  

Benefits of Getting Pre-Approved for a Mortgage

The benefits of a pre-approval letter are twofold. 

On one hand, it will help you determine what you can afford and the amount you’ll be able to borrow based on your overall financial health. Knowing this information ahead of time will help avoid any disappointing situations that may arise when looking outside your spending limit. 

Additionally, it will put you in a much stronger position with sellers. It shows that you are a serious buyer, who is actively looking and can get the deal done smoothly.  

Getting to the final step of the closing process, only for the deal to fall through, can be devastating to the buyer and seller alike. 

Because of this, some sellers will not even entertain a potential buyer who has not been pre-approved. 

Knowing a qualified lender has already vetted the buyer will help to ensure that the deal will not be hindered due to a funding issue. 

In a competitive market, a pre-approval letter will help you stand out among additional offers on the table, especially if these home shoppers have not yet taken this step. It will allow you to make an offer quickly and with confidence. 

How to get a pre-approval letter?

Be prepared for the lender to thoroughly dig into every chapter of your financial story, past and present. 

Here’s a list of the documentation you must provide:  

Proof of Income and Employment

W-2 Wage Earners:

  • A copy of your W-2 form
  • Your two most recent pay stubs
  • Records of any overtime pay, bonuses, or differential pay

Independent Contractors, Self-employed Individuals, and Freelancers:

  • A copy of your 1099 tax form
  • Year-to-date profit and loss statements
  • Any documentation regarding partnerships 

Real Estate Income:

  • Documentation of any rental income, including the address, lease, and current market value. 

Assets

Brokerage and Retirement Account Statements:

  • Investment accounts
  • CDs
  • IRAs
  • 401(k)s. 

Bank Statements:

  • At least 60 days’ worth of statements for every account in your name. 

Debts

 you must include the creditor’s name, address, account number, loan balance, and minimum payment amount per month.

  • Student loans 
  • Credit cards 
  • Other mortgages
  • Auto loans
  • Boat loans
  • Etc. 

Other Documentation That May Be Required

  • Rent Payment Proof
  • Child Support and Alimony Payment Information
  • Bankruptcy or Foreclosure Documentation 
  • Proof You Can Afford a Down Payment

How long is a pre-approval letter good for?

A mortgage pre-approval letter is typically valid for 60 to 90 days.

This means that you have up to three months to find a home and apply for a mortgage before your pre-approval expires. If you do not find a home within this time frame, you will need to reapply for a new mortgage pre-approval letter.

What is the possibility of getting denied after a pre-approval letter?

Although mortgage pre-approval letters are helpful, there is always the possibility of being denied for a mortgage after you have been pre-approved.

This can happen for a number of reasons

  • Employment situation changing
  • Credit score decreasing

If you are denied for a mortgage after you have been pre-approved, you will need to reapply for a new mortgage and go through the entire process again.

Do pre-approval letters hurt credit scores?

Getting a mortgage pre-approval letter should not have any negative effect on your credit score.

In fact, it may even have a positive effect as it shows you are actively trying to get a mortgage and are financially responsible.

How many pre approval letters should I get?

It is a good idea to get multiple mortgage pre-approval letters.

This will allow you to compare offers from different lenders and choose the best one for you. There is no commitment to take out a mortgage with the lender who has pre-approved you. 

In fact, you should shop around for lenders before signing on the dotted line. It’s best to compare offers, really taking into account the proposed interest rate and other fees. 

When getting multiple mortgage pre-approval letters, be sure to let each lender know that you are shopping around so they can give you their best offer. This is especially important if you are trying to get a mortgage with bad credit.

Now that you know how to get a pre-approval letter for a mortgage, it’s time to start shopping around for lenders!

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