When a lender grants a client a mortgage pre-approval, they provide a formal document outlining the preliminary terms under which they are willing to lend money to the borrower for purchasing a home. A pre-approval is based on the borrower’s financial situation, creditworthiness, and other factors at the time of application. It’s not a guarantee.
Here’s what the lender typically gives when granting a pre-approval:
Pre-Approval Letter
The main item the lender provides is a pre-approval letter, which serves as a formal indication of the borrower’s eligibility for a mortgage under certain conditions. The letter typically includes the following details:
- Maximum Loan Amount: The lender states the maximum amount they are willing to lend based on the borrower’s financial profile.
- Interest Rate (Often Conditional): The letter may mention the current mortgage rate offered, although it’s often subject to change unless the borrower has locked in the rate.
- Loan Type: The letter may specify whether the mortgage is a fixed-rate or variable-rate loan, and the term of the mortgage (e.g., 5 years, 30 years).
- Down Payment Requirements: The amount or percentage of the purchase price the borrower needs to put as a down payment.
- Conditions or Contingencies: The pre-approval letter often includes specific conditions that must be met before the final mortgage approval is granted. Common conditions include:
- Verification of income and employment
- Property appraisal that meets lender requirements
- Satisfactory credit check at the time of final approval
- Proof of down payment and its source
Pre-Approval Validity Period
The pre-approval is usually valid for a set period, often 60 to 120 days. This time frame allows the borrower to shop for a home with confidence, knowing that they are pre-approved for a specific amount. If the borrower doesn’t find a home within this period, they may need to re-apply for another pre-approval.
Rate Hold (Optional)
Some lenders offer a rate hold as part of the pre-approval process. This means the lender locks in the current interest rate for a specific period (typically the same as the pre-approval validity period). If mortgage rates increase before the borrower finds a home and completes the purchase, they may still qualify for the lower locked-in rate. If rates drop, many lenders will allow the borrower to benefit from the lower rate.
Confidence to Make Offers
The pre-approval letter gives the borrower more confidence to make offers on homes within their price range, as it indicates that the lender is likely to approve a mortgage up to the specified amount. It can also make the borrower’s offer more attractive to sellers, especially in competitive markets, as it shows the buyer has already taken steps to secure financing.
Subject to Final Approval
It’s important to note that pre-approval is not a final mortgage approval. The lender will still need to:
- Confirm the specific details of the property (e.g., ensure the appraisal meets expectations).
- Re-verify the borrower’s financial situation, especially if there are significant changes (e.g., new debt, job loss).
- Ensure that the borrower meets any other conditions outlined in the pre-approval.
Documents Reviewed
To grant a pre-approval, the lender typically reviews a variety of financial documents from the borrower, such as:
- Income Verification: Pay stubs, employment letters, tax returns, or financial statements for self-employed borrowers.
- Credit Report: The borrower’s credit score and credit history are thoroughly reviewed.
- Assets and Liabilities: Bank statements, investment accounts, and any outstanding debts are analyzed.
- Down Payment Source: Documentation confirming where the down payment funds are coming from (e.g., savings, gift from family).
Summary
A mortgage pre-approval provides the borrower with a pre-approval letter that details the maximum loan amount, potential interest rate, and loan terms. It also serves as a commitment from the lender, subject to certain conditions like property appraisal and final verification. This letter gives the buyer greater confidence when house hunting and making offers.
