What is mortgage pre-approval?
Mortgage pre-approval refers to the process by which a mortgage lender decides how much money they’re willing to lend you to buy a home. You’ll receive this estimated loan amount in the form of a pre-approval letter. This document isn’t an absolute guarantee but is meant to serve as a well-researched evaluation of your creditworthiness.
Pre-approval vs. pre-qualification
Pre–qualification can give you a rough idea of your purchase budget. The pre-approval process will take a deeper dive into your finances and credit history to give you a more accurate estimate of what you can expect to borrow.
Mortgage pre-approval process
Pre-approval starts with a mortgage application. You’ll also need to submit a few important documents, including:
- Pay stubs
- Bank statements
- Tax returns
- W-2s
The entire process can take up to three business days, though some lenders may be able to move things along more quickly.
The benefit of pre-approval for homebuyers
Is it necessary to receive a pre-approval letter to purchase a home? No, but it helps.
For starters, a pre-approval letter can give you a clearer picture of your purchase budget. It can also give you more credibility in the eyes of real estate agents and even sellers.
That’s because sellers may take your offer more seriously if they know there’s a lender willing to back you up. By the same token, real estate agents may be more willing to work with you if they have a clear understanding of your price range.
Factors to consider
The pre-approval process will involve a thorough review of your financial situation. This includes factors like your:
- Income
- Credit history
- Debt-to-income ratio
Before you can be pre-approved for a mortgage, your lender will check your credit score and consider your income and debts to decide whether you qualify for a home loan. Your financial situation will also determine the loan amount, mortgage term, and interest rate.
Validity period
How long does mortgage pre-approval last? The answer isn’t set in stone, but homebuyers can generally expect their pre-approval to last for up to 90 days.
Typical duration
Many lenders will put an expiration date directly on the pre-approval letter. This typically ranges from 30 to 90 days.
Be aware that the specified period can vary by lender, and if your finances change during this time, it could affect the validity of the terms and amount of your pre-approved loan.
Furthermore, because the duration is only as long as 90 days, it’s important to apply for pre-approval only when you’re ready to commit to buying a house. Otherwise, you’ll need to apply for renewal or an extension.
Significance of validity period
If you haven’t settled on a house before the expiration date, you can request a renewal from your lender. However, keep in mind that during the pre-approval process, your mortgage lender checks your credit score. This is considered a hard credit inquiry, which can temporarily lower your score.
For this reason, if you apply for pre-approval from multiple lenders, try to do so within the same 15 to 30-day window. Why? Because most consumer credit bureaus will treat multiple credit checks during this window as a single inquiry, which can minimize the impact to your credit score.
Factors influencing pre-approval duration
Pre-approval doesn’t last forever — as mentioned, expiration dates can range from 30 to 90 days. But the exact duration can depend on various factors, such as those below.
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Changes in financial circumstances
If your financial situation changes, your loan approval could also change. If you lose your job, for example, you may no longer qualify for a loan of the same size. Alternatively, if you pay off a loan, your debt-to-income ratio will be lower, which may qualify you for a better mortgage interest rate. This can potentially result in a higher estimated loan amount.
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Fluctuations of interest rates
In some cases, mortgage interest rates can shift during your pre-approval period. If rates rise unexpectedly, you may no longer qualify for a loan of the same size, which means your purchasing power may decline prior to the end of your pre-approval period.
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Changes in lending regulations
The lending industry is highly regulated, and it’s possible that changes in regulations could affect your ability to qualify for certain types of loans. For example, some government-backed loans require certain minimum credit scores to qualify. Changes in these requirements may influence your ability to secure a loan of this type.
Extending or renewing pre-approval
In some cases, it may take longer to buy a home than you initially expected. If this happens, you may need to extend your pre-approval past its original deadline.
Reasons for extending pre-approval
There are several possible reasons you may need to renew or extend your pre-approval period, such as:
- You’re still shopping for the right house
- You need time to review your finances
- You experienced an unexpected delay with your real estate agent
Essentially, if you haven’t bought a house during your pre-approval period, your lender will most likely allow you to apply for an extension or renew your pre-approval letter.
Process of extending or renewing pre-approval
Unfortunately, the process of renewing your pre-approval letter is the same as the original application. You’ll need to submit updated paperwork outlining your finances, and the lender will perform another hard credit inquiry, which means you’ll take another small hit on your credit.
The good news is that the process should be quick and smooth since you’re simply updating your information. Additionally, the impact to your credit will be minimal, and besides, it’s usually necessary when buying a house.
