Mortgage Pre-Approval

You'll hear about two ways of estimating your borrowing power: pre-qualification and pre-approval. Just remember: They are not the same thing.

If you are in the early stages of the home-buying process, getting pre-qualified by a lender gives you a good idea of what you can borrow. You simply provide income, debt, and down payment figures and the lender, in turn, provides you with an estimate of how much house you can afford. This is often done quickly, over the phone, and you have no obligation to use that lender to get a mortgage.

Pre-approval Is Key

Pre-approval is the next big step. This process is much more involved, but will provide you with a specific dollar amount that you can afford. Most real estate agents will tell you that getting pre-approved is key to getting the home you want. Lenders and sellers will know you are serious about buying when it's time to make an offer. And in hot real estate markets, a buyer may need to act fast; if the competing buyer has a pre-approval in hand and you don't, they win.

Pre-approval is quick and relatively painless. Usually you can get pre-approved within 24 hours with the necessary income verification and supporting paperwork on hand; online sites can pre-approve you immediately, but you'll have to provide the verification to a lender eventually. And, as with pre-qualification, you are under no obligation to use that lender for the loan (though most buyers will).

What You Need for Pre-approval

• Pay stubs and W2s (Lenders are looking for income verification for two years)
• Two or three months of bank statements
• If you are self-employed, you will need tax returns from the last two years
• Divorce decree (if applicable)
• Loan documents on your current home (if applicable)
• Many lenders and brokers will ask you to pay for the credit report required for pre-approval, but this is generally the only fee you will encounter during pre-approval (sometimes, though, a lender will charge a fee; be sure to ask if it's free)

Buyer's Tip:  If you get a portion of your down payment from good ol' mom and dad, you need to leave it in the bank for more than two months or obtain a gift letter explaining that the money is a gift, not a loan.

 By Diane Tuman

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Related Links

• Basic Mortgage Questions
• Credit Report
• Credit Reports Explained
• Coming Up With a Down Payment