A pre-approval is a lender’s written statement that you qualify for a mortgage up to a certain amount, based on information the lender has checked. Buyers in Concord, Charlotte and everywhere else usually submit one with an offer, and many listing agents expect to see it before they will present an offer to the seller.
This guide covers what a pre-approval is, what lenders commonly ask for, how the credit check works, and what can change an approval between the letter and closing day.
Pre-qualified and pre-approved are different things
A pre-qualification is an estimate based on information you provide, such as your income, debts and savings. Usually nothing is verified. It can be a useful starting point for thinking about a budget.
A pre-approval involves verification. The lender reviews documents such as pay stubs, bank statements and a credit report, then issues a letter stating the loan amount and loan type you qualify for, subject to conditions.
The terms are not used consistently across the industry, so it is worth asking any lender what a given letter was based on. If no documents were reviewed and no credit report was pulled, the letter is closer to a pre-qualification regardless of what it is called.
Documents lenders commonly request
Every lender sets its own requirements, and the list depends on how you earn your income. For a borrower paid on a W-2, a typical starting list looks like this:
- Recent pay stubs, often covering the most recent 30 days
- W-2 forms for the last two years
- Bank statements, often the most recent two months, for any account holding funds for the down payment and closing costs, including every page
- A government-issued photo ID
- Documentation of any other income you want considered, such as a pension, Social Security, alimony or rental income
Self-employed borrowers are usually asked for two years of personal and business tax returns, and sometimes a year-to-date profit and loss statement. Lenders also calculate self-employed income differently from W-2 income. Our guide to getting a mortgage when you’re self-employed explains how.
Gathering these documents before applying tends to shorten the process, because missing paperwork is one of the most common causes of delay.
How the credit check affects your score
A pre-approval normally involves a hard credit inquiry, which can lower a credit score by a small amount, typically a few points.
Credit scoring models recognize that people compare mortgage offers. Multiple mortgage inquiries within a short period are generally counted as a single inquiry for scoring purposes. The length of that period depends on the scoring model and ranges from 14 to 45 days. Comparing lenders inside that window usually has about the same effect on a score as a single inquiry.
How long a pre-approval lasts
Pre-approval letters carry an expiration date, commonly somewhere between 60 and 90 days, though it varies by lender. After it expires, a lender will typically ask for updated pay stubs and bank statements, and sometimes a new credit report, before issuing a new letter.
Because of that, buyers who are still many months away from purchasing often wait to get formally pre-approved until they are ready to make offers.
The approved amount is a maximum
The figure on a pre-approval is the most the lender is willing to lend under its guidelines. It is not a recommendation about what to spend. The monthly payment also includes property taxes, homeowners insurance, mortgage insurance where it applies, and any HOA dues, and each household weighs those costs against its own budget. A mortgage calculator is a simple way to see how the payment changes with the purchase price.
Some lenders will issue a letter showing a specific offer price rather than the full approved amount. Buyers sometimes ask for this so the seller’s side does not see their maximum. It is worth asking whether a lender provides that option.
What can change an approval before closing
A pre-approval is conditional. Lenders re-verify key information before closing, often including a final credit check and employment verification. Changes during that period can affect the approval. Common examples include:
- New credit accounts or loans, such as a car loan or financing for furniture, which add to your debt-to-income ratio
- A change in employment, particularly a move to self-employment, commission pay, or a different line of work
- Large deposits that cannot be documented. Lenders need to verify the source of significant deposits. Gift funds are usually allowed with proper documentation, such as a signed gift letter.
- Late payments on existing accounts, which can lower a credit score
- Co-signing a loan for someone else, since that debt can be counted against you
If a change like this is unavoidable, borrowers generally tell their lender before it happens so its effect can be reviewed.
When buyers usually get pre-approved
Many buyers get pre-approved before they begin touring homes. Having a letter in hand means an offer can be written as soon as the right property comes along, and it gives the buyer a clear picture of their price range before they start looking. The general steps from application to closing are outlined on our process page.
This article is general information, not financial or legal advice. Lending guidelines vary by lender and loan program and change over time. Questions about your own situation? Contact us.