What Is a Mortgage Preapproval Letter?

By: , Contributor

Published on: Nov 15, 2019 | Updated on: Nov 25, 2019

It pays to get confirmation that you’re eligible for a mortgage -- even if you’re not ready to lock one in.

Buying a home is an exciting but complicated endeavor. You have to narrow down your priorities when searching for a place to call your own, but you also need to figure out how much you can afford to spend.

Enter the mortgage pre-approval letter. When you get pre-approved for a mortgage, you'll find out exactly how much money you're eligible to borrow. That helps you better focus your search on properties within your financial reach.

How mortgage pre-approval works

Getting pre-approved for a mortgage isn't the same thing as getting prequalified. When you're prequalified, a lender has identified you as potentially being eligible for a mortgage. You haven't gone through an official approval process yet.

On the other hand, to get pre-approved for a mortgage, you have to submit financial information to a lender for additional vetting. That information generally includes the following:

  • Proof of income, including pay stubs and W-2s.
  • Proof of assets, such as bank or brokerage account statements.
  • Your most recent tax return.
  • Your outstanding debt.
  • Your employment status -- where you work and how long you’ve been there.

Once you've provided that information, a lender will usually access your credit report and review it for red flags. They'll also look up your credit score. The higher that number, the better. Assuming everything checks out, the lender in question can provide you with a pre-approval letter stating the amount you're eligible to borrow based on your financial circumstances.

Why get a mortgage pre-approval letter?

Many people wait until they've found a home they want to buy to apply for a mortgage. But having a pre-approval letter on hand could prove quite valuable in the course of your home search.

For one thing, that pre-approval will make for a more grounded search. If you see that you're approved to borrow $300,000, and you have $60,000 for a down payment, you'll know not to look at a $450,000 house. It's that simple.

Furthermore, when you embark on a home search with a mortgage pre-approval letter in hand, it shows both real estate agents and sellers that you're a serious buyer with the ability to make good on an offer.

This can be handy if you find yourself in a bidding war. Sometimes, multiple buyers will try to outbid each other for the same property. If you're the only one who's been pre-approved for a mortgage, the seller may accept your offer since you've proven yourself capable of seeing it through.

A worthwhile step to take

It pays to get a pre-approval letter if you're looking to buy a home and will need a mortgage to finance it. Just be aware that a pre-approval letter doesn't guarantee that you'll secure a mortgage. To formally qualify, you'll need to fulfill other criteria, such as buying a property that appraises for a high enough value in the eyes of your lender.

Furthermore, keep in mind that mortgage pre-approvals generally expire 60–90 days from when they're issued. Activity on your credit report could change over time, as can your income and employment status. And that might change what you can afford.

Finally, shop around for mortgage pre-approvals from different lenders -- but do so within a relatively short time frame.

Remember, lenders place an inquiry on your credit record to grant pre-approval. If you get a few pre-approvals around the same time, it may count as a single inquiry, which is better for your credit score.

Along these lines, just because a lender pre-approves you doesn't mean you have to move forward. Mortgage rates can fluctuate from month to month, so it always pays to be on the lookout for the lowest one possible. It may be worth getting pre-approval from another lender if they're offering a better deal.

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