Once you've created a wish list with your agent, the next step in making your home buying experience a smooth and pleasurable one is getting pre-approved for a mortgage loan. 

Getting pre-approved gives you an accurate idea of how much money you can borrow and establishes a budget, which lets you know what price range you can shop in.

Getting pre-approved also lets home sellers know that you are working with a lender and that they won't be wasting their time with someone who can't afford their home.

A mortgage pre-approval is a promise from a lender to provide you with a certain amount of money at a specific interest rate to buy a home.

The lender is confident that you can make the future monthly mortgage payments based on your credit history, debt, income, assets, and employment.

PRE-APPROVED vs PRE-QUALIFIED

Although these terms are used interchangeably, they are not the same thing.

When your lender requests and verifies your credit report, pay stubs, tax returns, savings accounts, investment accounts, etc., you get pre-approved.

When you report your income, debts, and assets to your lender and your lender tells you that you qualify for a certain amount of money at a specific interest rate "based on the numbers you gave us", you get pre-qualified.

A pre-qualification provides a rough estimate of how much you can borrow to buy a home, but a pre-qualified buyer does not carry the same weight as a pre-approved buyer in the eyes of a knowledgeable home seller or real estate agent.

A pre-approval saves time and strengthens your bargaining position with a seller.

CREDIT

The first thing your lender will do as part of the pre-approval process is review your credit report and play close attention to your credit score, credit history, and debt.

The higher your credit score, the better your interest rate.

That's why it's important to check your credit report before getting pre-approved. This gives you time to clear up any errors or problems you may find on your credit report before you start shopping for a home.

The three major credit reporting agencies - Experian, Equifax, and TransUnion - offer a free copy of your credit report once every 12 months. You can get all three reports at www.annualcreditreport.com.

INCOME & EMPLOYMENT

Steady income and employment play a big part in the pre-approval process. Proving you have both gives your lender confidence that you will repay the loan.

Be prepared to provide your lender with W-2's, pay stubs, income tax returns, and proof of any additional income.

In addition to verifying your pay stubs, your lender will contact your employer to confirm that you are still employed and verify your salary.

Thinking about changing jobs? Let your lender know before you do. Many lenders require a consistent work history and may deny you if they find any gaps after you have been pre-approved. 

Self-employed borrower? You will need to provide a significant amount of additional paperwork concerning your business and income.

ASSETS

In addition to income and employment, your lender will want to know more about what assets you own. 

Lenders want to confirm that you have enough liquid assets to cover the down payment, closing costs, and reserves in case a financial emergency leaves you unable to make your mortgage payments.

Be prepared to provide your lender with bank statements and statements for investment accounts, such as 401(k), IRA, stocks, bonds, mutual funds, etc.

PRO TIP

Not all pre-approvals are created equally. 

Working with a lender that has an in-house mortgage underwriter is a huge advantage. 

Having a mortgage underwriter review your file during the pre-approval stage allows you to close faster and gives you a competitive advantage over buyers who have to wait until after the formal application process to have an underwriter review their application.