Why do you need to be pre-approved for a mortgage?

written by Sarah Peterson
12 · 07 · 20

Buying a home may seem like a stressful process, especially if you’re just at the starting line. But with extensive research and careful preparation, the pathway to homeownership doesn’t have to be a daunting one. 

If you’re looking to add “first-time homebuyer” to your resume, you may be considering a mortgage to help finance the purchase. 

Before you start endlessly scrolling through Zillow and going to open houses, it’s important to get pre-approved for a mortgage. 

What is a pre-approval letter?

A lender will take an initial look over your finances and analyze how much you can borrow based on that information.

This will result in a written pre-approval letter, stating the loan amount the lender is likely to approve once you officially apply for a mortgage down the road.

Essentially, it will spell out how much you’re qualified to borrow, your proposed down payment, and the type of loan program that will be used.  

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

What are the benefits?

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. 

When should you apply for a pre-approval?

Before you start contacting lenders, do a basic check of your financial standing. 

Assess your current budget and how that would change based on a home purchase. Evaluate your ability to make a down payment and don’t forget to factor in closing costs.

Don’t make a decision solely based on what the bank says you can afford. Do your own research. 

Once you have personally dived deep into your finances, it’s time to apply for a pre-approval. 

Remember – get the official letter before you start heading to open houses. 

What to expect

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:  

1. 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. 

2. 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. 

3. 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. 

4. 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

Most pre-approvals are acceptable for 60-90 days from receiving the official letter. Hopefully, this will allow you enough time to find a home and get an accepted offer. 

Are you tied to the lender who provided your pre-approval?

To put it simply, no. 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. 


Sarah Peterson


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