What is a Pre-Approval Letter?

A preapproval letter is a document that states how much a lender is willing to loan the buyer(s) for a new home. Often, it is the document that will help guide your relative price range assuming the buyer is not paying “cash” for the property. More importantly, the pre-approval letter will help direct the buyer and agent how much the buyer can afford when bidding on a property.

How Does One Get a Pre-Approval Letter?

First, he or she will want to be in the mindset of seriously considering purchasing a property given there is an associated credit check. It’s important to understand that lenders issue letters valid for a specific period of time, such as 30, 60, or 90 days. Although you can certainly reapply, it always helps to manage expectations, timelines, and your credit history when utilizing the pre-approval letter in the 90 day window or purchasing a home. 

Second, the buyer will want to consult with and evaluate different lenders and/or banks. During the prequalification process, lenders will review your credit profile, credit score, income, and banking information to determine your approval odds. Lenders will need a) proof of identity b) proof of income c) proof of assets and debts.

If approved, the letter will outline specific terms of the offer, any applicable fees, and the tentative interest rate determined according to the economic market. It’s also important to note that your interest rate may fluctuate due to market conditions until your rate is locked.

When you’re ready to submit an offer with your agent and enter into the mortgage process, the lender may then ask for updated financial documents (banking statements) to lock in the loan amount.

The Bottom Line

The preapproval letter is the first step into homeownership. It will help guide the buyer and agent how much the buyer can afford when bidding on a property to expedite the search process. To get pre-approved, buyers will want to consult with lenders and banks to verify their a) identity b) proof of income c) financial statements d) tentative interest rate.

Considerations: Article has been modified and adapted from Nerdwallet.com, Rocket Mortgage, Zillow, and Investopedia.

Disclaimer: For Informational Purposes Only. Any and all information by or on this Site is provided for promotional or informational purposes only and is not to be relied upon as a professional opinion. Buyers and Sellers are encouraged to speak with their personal lawyers, accountants, and advisors as to how best the information can be used.