Homebuyers

If You’re Buying a Home, These 5 Steps May Help You Get Pre-Approved for a Mortgage

In today’s housing market, the difference between landing the home you love and watching it slip away may come down to how prepared you are before you ever make an offer.

That preparedness often starts with one document: a mortgage pre-approval letter. It’s a lender’s written estimate of how much you may be able to borrow after verifying your income, assets, and credit score.

A mortgage pre-approval may give you an advantage in a competitive market. It essentially tells sellers that a lender has already vetted your finances and you’re likely to be approved for a loan. That pre-approval allows you to move quickly when you find the right place. And it may help you compete against a cash offer.

Unfortunately, not everyone may qualify for a mortgage pre-approval the first time they apply.  But many of the factors that lenders consider are things you can improve before you apply.

“By having this approval…[it] provides you with an edge from other offers,” said Karen Kostiw, a real estate agent at Coldwell Banker Warburg in New York City.

Below are the five steps you can take to improve your odds of getting pre-approved for a home loan.

Mortgage pre-qualification vs. pre-approval: What’s the difference?

When you’re talking with real estate agents and mortgage lenders, you may hear the words pre-qualification and pre-approval quite a bit. While the two are similar in some ways, a pre-qualification and a pre-approval are two distinct parts of the homebuying process.

A mortgage pre-qualification is an early estimate from a lender of what you may be able to borrow based on the financial information you provide. It gives you an idea of the price range you may qualify for before you start seriously shopping for a home.

By contrast, a mortgage pre-approval is offered after a lender has verified your financial information, including your income and assets, and pulled your credit score. The credit check may temporarily cause your credit score to dip a few points.

While a pre-approval can make your offer more attractive to sellers, it’s important to note that it’s not a final approval. It doesn’t guarantee your mortgage will be approved, especially if you lose or change jobs, take on more debt, or your credit score drops.

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How to get pre-approved for a mortgage

Homebuyers should understand how to get pre-approved for a mortgage. Lenders base your pre-approval on what they can verify about your finances. That means there are opportunities to improve your odds and mistakes that could get your application denied.

1. Get your paperwork ready. Having your financial documents ready ahead of time can help keep the process moving smoothly and avoid delays. Make sure the information you provide on the application is supported by your documents.

“Any discrepancies or fraudulent information provided will also contribute to a pre-approval being denied,” said Kostiw. 

Gather documents such as at least two years of tax returns, several months of pay stubs, and bank statements. If a family member plans to help with your down payment, it’s a good idea to get a gift letter ready ahead of time.

2. Pay down your debt. A strong credit score is a plus. However, it's not the only factor lenders consider. They typically consider an applicant’s debt-to-income ratio (DTI). The ratio compares your monthly debt payments to your gross monthly income.

If you’re a few months out from applying for a mortgage, consider ways to increase your income. You may want to ask your employer for a raise or take on a side hustle.

You could also look for ways to pay down debt, such as paying off a credit card or reducing other balances. Either step can help improve your debt-to-income ratio.

3. Don’t take out any new loans. Any new debt could impact your mortgage pre-approval odds because it adds a monthly payment to your credit report. That raises your DTI and lowers the amount of money you may qualify to receive.

You don’t want to buy a car, for example, or take on any new debt.

“When in doubt, speak with your lender prior to any action that may impact your financial picture,” said Kostiw.

4. Don’t open or close any credit cards. Opening or closing credit cards may influence the factors that make up your credit score at a crucial time. A new card adds a hard inquiry to your credit report and typically lowers your average account age. Closing one can raise your credit utilization.

Ultimately, your credit score can be one of the keys to homeownership, so it's important to avoid any moves that could hurt it.

5. Don’t quit or change jobs. A change in your employment status while you’re getting pre-approved can delay your application or require the lender to take another look at your finances.

Even if you’re earning more, lenders may want extra documentation before moving forward.

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How long does it take to get a mortgage pre-approval?

Many homebuyers are able to get pre-approved for a mortgage within a day or two depending on their financial situation and lender.

“Typical pre-approvals on cut and dry scenarios usually can be done same day or next day,” said Carryne Latada, a senior mortgage advisor at New American Funding in Brea, Calif.

Make sure your income and paperwork are in order for a faster approval. It could take longer if your finances are more complex and the lender requires extra documents for verification. In that case, the timeline to get a pre-approval may depend on how soon the lender receives the documents needed to verify your application details.

So, how long does a pre-approval for a mortgage last? They typically last for 90 days from the date they are issued.

Latada recommends refreshing your income documents every 60 to 90 days if you’re still actively looking for a new home.

Does getting pre-approved for a mortgage hurt your credit?

A mortgage pre-approval typically requires a hard credit inquiry. This may temporarily drop your credit score by a few points. However, your score typically recovers quickly.

Some lenders may be able to issue a pre-approval using a soft credit pull that doesn’t affect your score.

By getting your finances in order before you apply, you’ll improve your chances of getting approved and be ready to act when you’re ready to buy a home.

Carryne Latada NMLS # 327779