Guide to Mortgages Advice & Articles
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Mortgage Pre-approval Letter

Now that you have found a lender, you need to get a mortgage pre-approval letter. This letter simply indicates that you have applied for a mortgage and that an underwriter has documented your income, assets, and employment. Your credit report has been analyzed, and the lender has determined that it will fund your home purchase as long as your situation does not change and the property meets its guidelines.

Your lender can give you a pre-approval mortgage letter, which can make it easier as you shop for a home. With pre-approval, your offer needn't include a loan contingency (a clause that says you have not yet been approved for a mortgage and are not obligated to complete a purchase if you can't get approved). This can make it more attractive to sellers and put you ahead of your competition. Mortgage pre-approval can be helpful in other ways, too. Most importantly, the pre-approval process is like a "dry run," allowing you and your lender to sort out any issues in your file that could prevent your loan from closing. The last thing you want is to be in escrow and with movers packing your stuff when up pops a question about the baseball card collection you sold to get your down payment, or a check you bounced in college that suddenly turned up as a collection account ten years later. It's better to hash those things out without the pressure of a contract and a closing date.

Pre-approval versus Prequalification

It's important to realize that prequalification is completely different from mortgage pre-approval. Prequalification is a first step -- it's very preliminary, and involves simply telling the lender what your assets, debt and and income are, and sometimes (but not always) your credit report will be pulled. The main purpose of mortgage prequalification is estimating how much home you can afford. The information you provide is not verified. No application is taken and no underwriting is performed. Prequalification carries considerably less weight with real estate agents and home sellers. It's a good first step and can eliminate the hopelessly unqualified, but if you're serious about buying a home, you need to go further.

However, prequalification can be truly helpful during the home buying process because it can help you narrow down your home price range and prevent a huge waste of time.

Mortgage Pre-approval Is not Forever

Mortgage pre-approval is also called "credit approval," because your credit has passed muster. You, the borrower, have been approved, and now you only need find to a property that complies with the lender's requirements. Mortgage pre-approval is not good indefinitely -- it has an expiration date, usually in 90 days. Once that date has passed, the file must be updated with new income and asset documentation and a fresh credit report. It's good to keep your pre-approval current so that when you find a property you can close quickly and with minimal fuss.

Mortgage pre-approval is not an absolute guaranty of financing. Lenders perform quality control procedures prior to closing, including a final check to make sure you haven't increased your credit balances or opened new accounts. They also re-verify your employment to make sure you're still at work and can still afford the property. Once you're in escrow, be careful -- you don't want to give the lender any reason to decline your loan.

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