You put all your ducks in a row, you’re done renting, and now you’re ready to take the financial plunge that everyone wants to dive headfirst into: becoming a homeowner.
Unless you’re sitting on a trust fund that shells out six figures per year, chances are you’re among nearly all Americans who do not buy their home in cash.
You need a mortgage, but in order for a financial institution to lend you that kind of money, they need to pre-approve you and see where your buying power lies.
You want to know how to get pre-approved for a mortgage? Buckle up, because there are far more factors at play than you may think.
5 Factors for the Pre-approval Process
Before you actually apply to be pre-approved for a loan, you have to understand how lenders calculate your credibility and lending risk.
- Credit Score: Your current credit score is one of the first things that they’ll pull to determine your eligibility. Don’t expect to get a good deal with a low credit score, or to be accepted at all.
- Credit History: This is beyond just your score. A good score right now doesn’t necessarily undo a horrible score from three years ago. The history of payments and information will play a vital role as well.
- Income: In many instances, you have to provide proof of income for the last two years (or more). If your income-to-debt ratio doesn’t land in the green zone, assuming that you get approved for the amount you’re expecting, you may be barred from lending for the time being.
- Employment History: Similarly to credit history, the fact that you’re currently making six figures when you weren’t three months ago matters. If your new level of income is only due to a recent job change or promotion, it may reflect poorly and lenders may assume you are impulsive, which increases their risk.
- Assets and Liabilities (Debt): Do you have more than liquid cash? Even if it’s not a lot, lenders want to see that you’re investing, not just stashing away wads of cash to afford the bare minimum of a down payment. Having assets that you don’t need to dig into (which will be verified by your income and the other factors we’ve listed) will put you in the good graces of lenders.
Pre-Qualification vs. Pre-approval & Why it Matters
This is where the big difference comes in. Being pre-qualified for a home loan is great, but it’s not the same thing as being pre-approved.
A pre-qualification process allows you to assess your financial situation, and see if you would even be available for pre-approval. Think of it as a stepping stone, although not always a necessary one.
Let’s take a look at the key differences between pre-qualification and pre-approval.
- If you’re not financially savvy, but you know you’re in the right range of buying a home, a pre-qualification process can help you determine if your creditworthiness, income, savings, and other factors make you pre-approval eligible.
- With a pre-qualification, there’s often no credit score impact because it’s all self-directed. You can use online tools to see if you pre-qualify with tons of lenders, or do it over the phone through their automated services. There isn’t a company doing a hard inquiry on your credit, so it can save you points (it’s always good to double-check and contest any marks if they happen though).
- You don’t actually need to prove any of the information you submit. You can just mess around with a pre-qualification form and see where you would have to financially be in order to pre-qualify for a loan. This can help you if you’re trying to set a goal to be eligible to buy a home in the near future.
- You don’t have to wait for weeks on end. Most pre-qualifications are done in minutes, sometimes even seconds, all through automated services. If you’re curious right now, you can just sign up for a pre-qualification form and see where you stand.
- This is a process you should begin when you’re 100% ready to buy a home. You’ve done the pre-qualification, you know where you stand financially, and now it’s time to actually look for a house. This is a serious step, which is why there’s such a contrast between this and pre-qualification.
- The process of pre-approval will impact your credit score, so it’s important to know what your score is and what kind of a hit you can afford. Keep in mind that you may not get the best deal from the first place you decide to submit a pre-approval application to, so your credit score may take more than one hard inquiry if you have to shop around for different lenders.
- When you submit your application for pre-approval, you must be able to prove your income and information. Everything has to be validated, otherwise the process will not go through properly. Never submit false or intentionally misleading information, otherwise you could face serious penalties under the law.
- Pre-approved tends to take longer than pre-qualification, so you’re going to have waiting periods. It’s not wise to begin your pre-approval process if you plan on securing a home in the next week, because as we’ll discuss later, you also shouldn’t be Zillow window shopping right now.
Pre-approval is important to know what your buying power is, where you’re able to buy, and what kind of lifestyle you can expect depending on the loan rates and terms.
Being pre-approved does not guarantee you a loan, and you have to be careful with what you do with your finances and credit between applying for pre-approval and actually receiving the mortgage loan.
Know the difference between pre-qualification and pre-approval, and understand that you aren’t owed anything by any financial institution unless they’ve agreed to terms in writing.
Mortgage Pre-approval FAQ's
Yes, your credit score will take a hit as a hard inquiry, meaning you will see one to five points taken off the top. This is a serious financial inquiry, so be sure that you’re not just at the threshold for a good mortgage loan rate.
You want to be a little bit above that line so that you don’t end up having pre-approval pulled out from under your feet because of a few credit score points.
Yes, your pre-approval can be pulled out from under your feet. We disclosed what not to do before you sign up for mortgage pre-approval, and that’s a list that should be taken to heart.
Avoid risky spending, changing jobs, lowering your credit, and be sure that you’re ready to move on a home within 90 days of your mortgage pre-approval going through.
Companies absolutely reserve the right to deny a pre-approval if the circumstances that led to that pre-approval have changed.
You can window shop if you’d like, but it’s not advised. Looking at houses before you get pre-approved can leave you feeling upset by the pre-approval amount, of having delusions of grandeur (even if it doesn’t feel that way at the time) about the caliber of home you can afford, and what lifestyle you’ll be leading.
In reality, most homebuyers are approved for far less than what they expect, and it can impact your decision-making process.
It’s best to avoid window shopping, although you should know what area you want to live in and the average median home price in that area. Just don’t look at specifics and build a fictitious faux life that you don’t have guaranteed.