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Pre-Approval for a Home Loan: What You Should Do

If you are serious about buying a house, getting pre-approved goes a long way to purchasing that dream home. A pre-approved loan tells the seller that you have financing to buy the home. If the seller has multiple offers, a buyer with a pre-approval looks better than a buyer who does not. Why waste time with a buyer who may or may not be approved?

Pre-approved is not the same as pre-qualified, although they are often used interchangeably. A pre-qualification means you have spoken with someone at a lending organization about possible mortgage amounts. Pre-approved means you have gone through the beginning phases of home loan approval, such as having financials sent to underwriting.

Preparing for Pre-Approval Process for your Home Loan

Look at your finances before you start the home-buying process or apply for a pre-approval. If you don’t, you may fall in love with a house that is outside of your budget, making it hard to settle for something that is. It’s never a good idea to overextend yourself when buying a home.

Mortgage Amount

Every lender applies a slightly different formula to determine how much a potential buyer can spend on a mortgage. Your combined debt for a mortgage plus car payment or student loans should not exceed 45% of your gross income. Some lenders may go as high as 50% of your gross income. Some financial advisors suggest not going over 35% of your gross income. Only you know how much you can comfortably afford. Remember, just because you can buy a house doesn’t mean you should.

Down Payments and Closing Costs

Conventional home mortgages require a down payment of 20% of the mortgage amount. Not all mortgages require such a high down payment. In some instances, you may only need 5% of the mortgage amount. When you apply for pre-approval, you should have the cash on hand to pay the down payment. That shows the lender you are financially capable of making the down payment.

You will also need to pay for closing costs. Depending on your circumstances, your closing costs can range from 3% to 5% of the loan amount. In many cases, as a homebuyer you can negotiate with the sellers of the home to pay your closing cost as part of the purchase agreement. In most cases, you will have to pay for private mortgage insurance (PMI) if your down payment is less than 20%. PMI protects the lender if your home ends up in foreclosure

Credit reports

Know your credit history and credit scores. You can review your credit report once a year for free by visiting Some credit monitoring companies provide free credit scores if you pay for their service. A strong credit history and a high credit score — above 740 — gives you a more extensive range of options when it comes to mortgage types and interest rates. If your credit score and history could use some work, consider paying down debt and making on-time payments.

Documents for Pre-Approval

Before lenders will pre-approve you for a loan, they will want to verify your financial information. The following information can make the process move faster.

  • Recent pay stubs
  • W-2 forms from the last two years
  • Proof of any additional income if using it to qualify for a loan
  • Previous two years of personal federal income tax returns
  • Prior two years of business federal income tax returns if you own a business
  • Driver’s license or U.S. passport
  • Social Security card or number
  • Copy of the front and back of your green card(s) if you are not a U.S. citizen
  • Bank statements that prove you have enough money to cover the down payment and closing costs
  • Gift letter stating that the funds being used for a down payment is a gift and not a loan or IOU
  • Last quarterly statements for asset accounts, including your 401(k), IRA, stock accounts, and mutual funds

Expect your lender to pull your credit report and to verify your employment.

Improving Your Pre-approval Odds

Suppose your credit history or credit score could use some work. It may be something as simple as an error on your credit report. Or, it isn’t clear from your financials how you plan to make the down payment. Whatever the stumbling block may be, work to remove it to create a clear path to preapproval.

Correct Your Credit Report

Credit reports may have errors that can impact your credit score, which will affect your pre-approval ability. You should look through your credit report for mistakes such as:

  • Incorrect identification
  • Incorrect activity
  • Identify Fraud
  • False accounts
  • Inaccurate payment history

You can dispute credit report errors using the Consumer Financial Protection Bureau’s guidelines or a credit repair service. A credit repair service helps clear your credit report of inaccurate or false information.

Pay down debt

Several factors go into how your credit score is calculated, including payment history and outstanding debt. Talk to a mortgage company about what parts of your credit history should be addressed to improve your credit rating. Most mortgage companies have simulator software that can project how much your score will improve if you pay down your debt.

Pad your savings account

The more money you have in savings, the more creditworthy you look. Make sure you have enough money to cover a down payment and closing costs. Then, add funds to help cover expenses for at least three months. You never know when an emergency will happen, and lenders want to make sure you can accommodate emergencies without impacting your mortgage payments. The more money you have in savings, the better.

Finding a Mortgage

If you are ready to look for a mortgage or you have more questions about the pre-approval process, you can speak with a Loan Agent by clicking our link "Speak to A Loan Agent" from our Home Page Our goal is to provide you with the most accurate mortgage information so you can make an informed decision.


    Only close family and relatives, such as aunts and uncles can “gift” you money for a down payment.

    The failure rate for a home purchase is 20% on average.

    Many lenders have NO PMI loans, even if you have a down payment of less than 20%.

    Veterans may qualify for a home purchase with no down payment using a VA Loan for purchase.

    Many condominiums are not FHA approved and therefore you will not be able to purchase the condo with an FHA Loan.

    FHA Loans give you greater flexibility with your debt to income ratio. In short, you can qualify for more loan with less income.

    Student loans can throw your debt to income ratio out of whack and disqualify you from approval due to excessive debt.

    Bankruptcy does not disqualify you from getting an FHA Loan as long as it has been 2 years since the recorded discharge date, or 4 years for a Conventional Loan.

    Many lenders will not accept documents, such as bank statements, that have any portion that has been blacked out or tampered with.
  • PRO TIP:

    Be sure to understand exactly how much loan you can be approved for before you fall in love with a home and get into a contract!
  • PRO TIP:

    Don’t move around assets during the processing of your home purchase loan, as it will trigger the underwriters to ask repeatedly for updated bank statements.
  • PRO TIP:

    Not every Realtor can produce the same results, so be sure to check their credentials and experience.
  • PRO TIP:

    Don’t just trust a pre-qualification from a licensed lending officer. Get pre-approved by an actual underwriter before you get into a home purchase contract.

Speak with a loan agent now!