3 Types of Mortgage Pre-Approvals

Navigating the home buying process can feel daunting, especially when it comes to securing financing. One crucial step in this journey is obtaining a mortgage pre-approval letter. Let’s walk through what this entails and why it's essential for your home buying experience.

What exactly is a mortgage pre-approval letter? Simply put, it's a document from your lender affirming their willingness to lend you money for a home purchase, up to a specific amount. This pre-approval is based on the financial information you provide and then they verify, such as your pay stubs and credit reports. It's essentially a green light from your lender, indicating they're ready to proceed with your loan application.

Now, why is obtaining a pre-approval letter important? Think of it as your golden ticket to the home buying market. By getting pre-approved, you'll gain clarity on your purchasing power. You'll know precisely how much you can afford, enabling you to focus your search on homes within your budget. This proactive approach saves you from the disappointment of falling in love with a property only to realize it's financially out of reach. Moreover, having a pre-approval letter in hand strengthens your position as a serious buyer when you're ready to make an offer on a house.  In some areas a pre-approval letter is required before you can view property. In most areas, a seller will not consider your offer without a pre-approval letter.

But are there instances where a mortgage pre-approval letter isn't necessary? Generally, if you're not buying a home outright with cash, you'll need one. However, it's essential to highlight that even if you're using your own savings to purchase a house, you'll still need to provide "proof of funds." This means having formal documentation from your bank confirming that you have the necessary funds for the purchase and that they are readily accessible to you.

When it comes to pre-approvals, it's crucial to understand the different types available. The three types of bank approvals are pre-qualification, pre-approval and fully underwritten approval.

Pre-Qualification

Pre-qualification is typically the initial step in the mortgage process. It involves a basic assessment of your financial situation based on the information you provide to the lender.  Generally, the lender only runs a “soft” credit report (does not impact your credit score) and this type of approval can be provided within hours.  Lenders usually provide a pre-qualification for free.  While pre-qualification can give you a rough estimate of how much you might be able to borrow, it's not a guarantee of financing. 

Pre-Approval

A pre-approval is a more rigorous process. It involves a comprehensive review of your financial documents, including income verification, credit history (“hard” credit report), and debt-to-income ratio. With a fully underwritten approval, you'll have a more concrete understanding of your borrowing capacity, giving you greater confidence as you search for your dream home.  The pre-approval takes longer than a pre-qualification. Depending on the lender it could take 2 days or up to a week.  There are minimal costs associated with a pre-approval.

Pre-Underwritten Approval

In a pre-underwriting approval, the pre-approval process goes the extra mile.  In addition to completing a mortgage application and pulling your credit report, the loan underwriter will go ahead and review your application.  They will perform the same due diligence on your documents as they would during underwriting the actual loan.  Ideally, once they examine your application, the underwriter will provide a signed “go-ahead” to grant you the loan.  The pre-underwritten approval can take several weeks.  A pre-underwritten approval is the costliest option as it not only includes fees for running your credit but loan application and other fees could be charged.   

In summary, obtaining a mortgage pre-approval letter is a crucial step in the home buying process. It provides you with clarity on your budget, strengthens your position as a buyer, and streamlines the purchasing journey. Keep in mind each of these approvals has an expiration date (generally 30 – 90 days). The first two options are the most common.  Whether you opt for a pre-approval, pre-qualification or fully underwritten approval, having this documentation in hand sets you on the path to homeownership success.

Be sure and ask your real estate agent for a lender referral.  Most agents can refer you to a lenders with a proven local track record of success in your area.