Reader question: “My uncle who is a real estate agent suggested that my wife and I get pre-approved for a home loan before we go out looking for houses. But he didn’t go into the details very much. He just said that sellers won’t ‘give us the time of day’ without a lender letter of some kind. My question, does the lender’s pre-approval letter guarantee we will get the home loan? I’m just wondering if it’s something worth celebrating.”
Keep the champagne on ice for now. You have a ways to go before you can celebrate anything. A pre-approval letter does not guarantee that you will actually get the loan. It simply means there is a chance you will get approved, if and when you clear the underwriting process (which is the real moment of truth).
It Doesn’t Guarantee Financing
Home loan pre-approval is one of the most popular, and most misunderstood, topics among first-time buyers. We get more questions about this particular subject than almost any other (aside from credit scores). There is a common misconception among first-time buyers that a home loan pre-approval letter guarantees financing. But that is not the case. It is a preliminary review of a borrower’s qualifications, to determine how much they might be able to borrow.
If and when you actually receive such a letter, you will notice plenty of disclaimers to this effect.
But don’t get me wrong. Pre-approval can be very helpful during the home-buying process. Having a letter from a lender will make you more competitive in the market. Real estate agents will be more willing to work with you. Sellers will be more likely to take you seriously. You’ll have an instant advantage over any buyers who haven’t obtained a home loan pre-approval letter. But it does not guarantee you will actually get the loan. It is not a commitment.
10 Things to Know About Home Loan Pre-Approval Letters
Here are 10 things every home buyer should know about home loan pre-approval letters:
- During the pre-approval process, the mortgage lender will examine your financial situation to determine if you are qualified for a home loan based on their qualification criteria. They’ll look at your credit score, your current debt level, your income and employment situation, and the “likelihood for continued employment.” Those are their primary checkpoints.
- The lender will pre-approve you for a home loan up to a certain amount. This will help you narrow your housing search, thereby saving you time and energy. It gives you a realistic price range based on your current income level, your debt load, etc.
- Home loan pre-approval typically happens on the front end of the buying process, before the house hunting, offer and negotiating process. That’s why it has a “pre” label. It is preliminary. It happens before underwriting. This distinguishes it from the final approval, which occurs after the underwriting process.
- Pre-approval is not a commitment to lend you money. Nor is it a guarantee from the lender. It is simply the lender’s way of saying they will likely approve you for a certain amount, as long as you clear the underwriting process with all of its checkpoints and requirements. It’s worth repeating: A home loan pre-approval letter does not guarantee that you will actually receive financing from a bank, credit union or mortgage company.
- During this process, the lender will likely ask you for a variety of financial documents. These include, but are not limited to, bank statements, IRS W-2 forms, tax returns, pay stubs and the like. They use these documents to assess the level of risk you bring, as a borrower, and also to measure your debt-to-income ratio and payment capacity.
- Home loan pre-approval is beneficial in other ways as well. It can help you spot credit, income, or debt-related problems that could prevent you from getting a loan. These include issues such as a low credit score, excessive debt, or insufficient income for the amount you are trying to borrow. You can then take corrective action based on the type of problem you encounter.
- These days, the pre-approval process can be conducted remotely by phone, fax, email and courier (DHL, FedEx, etc.). So you don’t necessarily have to use a lender in your immediate area. This allows you to shop around more freely, comparing offers and terms from a wider range of lenders.
- As mentioned earlier, a home loan pre-approval letter can make you more competitive in your local housing market. It shows sellers that you are a serious and capable buyer, having been “vetted” by a lender. This is particularly important in hot markets where there are multiple, competing offers from other buyers. You need every advantage you can get in this type of market. A lender letter gives you a leg up.
- Home loan pre-approval is one of the first steps in the overall qualification process. Once you make an offer to buy a house, you would then present the purchase agreement to your lender in order to get a final approval. The final approval will be issued once you clear the underwriting process. When roadblocks and obstacles arise, it usually happens during the underwriting stage. It is the most in-depth scrutiny you will undergo during the lending process. Getting a “clear to close” notice from the underwriter is cause for celebration.
- It’s possible to be turned down for a home loan even after getting a pre-approval letter from a lender. So, in the interim, try to avoid making any large credit purchases, opening new credit accounts, changing jobs, or falling behind on bill payments. All of these things can hurt your chances of receiving a final approval and closing on the home.
3 Articles You Should Read Next
We have an extensive library of articles and tutorials that explain the preliminary steps in the home loan process. Here are some selected articles you might want to read next, as they directly relate to the question at hand:
An Overview of the Pre-Approval Process
This article explains the process that takes place when you get pre-approved by a lender. It goes into more detail than the 10 points listed above. If you still have questions about how it all works, you’ll probably find the answers in this in-depth tutorial.
Mortgage Prequalification 101
First-time buyers often get confused between home loan pre-approval and prequalificiation. It’s easy to understand why — they sound like the same thing. In fact, they are two different procedures with varying levels of usefulness. This article explains why the “prequal” doesn’t hold much water.
Offering More than the Pre-Approval
Home buyers often look at homes that are priced above the amount they’ve been pre-approved for. You can make an offer on a such a property, as long as you can afford to cover the difference out of pocket.
Disclaimer: This article answers the question, Does a home loan pre-approval letter from a lender guarantee we will get the loan? This information has been provided for general education and does not constitute financial advice. Every lending scenario is different because every borrower is different. As a result, some or all of the information presented above might not apply to your specific situation.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author