Pre-Approval
Definition and meaning of Pre-Approval in real estate.
A pre-approval is a lender's formal, preliminary commitment to lend a specific amount of money to a prospective home buyer based on a comprehensive review of their financial credentials.
In more detail
To obtain a pre-approval, the borrower must submit an official application and provide documents such as tax returns, pay stubs, and bank statements. The lender pulls a credit report and conducts a rigorous review, checking the debt-to-income ratio and credit history. A pre-approval shows sellers that the buyer has the financial backing to make an offer, which makes their bid much stronger in competitive markets.
It is important to know that a pre-approval is not a guarantee of a loan, because the final approval depends on a property appraisal and satisfactory underwriting.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Typical validity | Sixty to ninety days |
| Required documents | Tax returns, pay stubs, bank statements, and credit check authorization |
| Watch out for | Taking on new debt or changing jobs after receiving pre-approval |
Before starting her home search, a buyer submits her financial documents to a bank and receives a pre-approval for a mortgage up to a specific limit, such as three hundred thousand dollars.
Frequently asked questions
Is a pre-approval the same as a pre-qualification?
No, a pre-qualification is a basic estimate based on self-reported financial information, while a pre-approval is a formal commitment based on verified financial documents and a credit check.
Does getting pre-approved affect your credit score?
Yes, because the lender performs a hard credit inquiry to verify your financial status, it may cause a temporary, minor drop in your credit score.