A pre-approval is a great way to have a better idea of the budget you will be working with during your buying process. It comes in the form of a letter from a lending company which indicates that they have reviewed your finances and will be willing to approve you of a home loan for a certain amount.

Getting a pre-approval is a good first step before you start looking for a home. If you want to learn more about it, take a look at the basics here!

 

Pre-approval Versus Pre-Qualification

While it’s easy to get the two mixed up, a mortgage pre-approval is not the same as a pre-qualification. A pre-qualification provides a rough estimate of how much a lender would be able to give you based on numbers you provide. This means that the details about your income, assets and debt may not be as thorough or accurate. A pre-approval, on the other hand, is a thorough inquiry into your finances where the lender checks your full financial history, employment, credit report. They will also look at all pertinent documents affecting your financial situation, as well as all your assets and liabilities, allowing you to get a more accurate estimate as to how much you can really afford to spend for your mortgage.

 

When to Get Preapproved

Pre-approval letters are typically valid for 60 to 90 days, because your finances and credit profile could change, so that the information you provided when you applied might no longer apply. This means when you do apply for the pre-approval, you need to make sure that you’re already in the process of looking for a home.

 

Prepare Your Financials 

It will be a good idea to make sure your finances are in order prior to starting the application process. Ideally, you should already be out of debt, have at least 3 to 6 months saved of emergency funds for expenses, and have at least 10% down payment ready. Having a healthy financial standing can also help in improving your chances of getting better rates. Get a good look at your credit history and make sure you have no outstanding or delinquent accounts.

Check Your Credit Score

Before reaching out to a lender, you should get a general feel of where you stand by checking your credit score. Various websites provide free credit score assessments (you can check this one out from Nerdwallet.com) for a convenient way to get this information. A credit score of at least 620 is recommended, but getting 740 or above will allow you to get the best mortgage rates.

 

Get Your Information Ready

One good way to save time when getting a pre-approval is having all your relevant information and paperwork ready. Some documents would be a proof of income with at least 30 days of pay stubs showing year to date earnings, tax returns for the past two to three years, banking and investment account statements, and W2 or 1099 Income Statements.