Pre-Approval

Pre-approval is a lender’s written commitment to provide financing up to a specified amount, based on verified documentation of income, assets, credit, and debt. This verification distinguishes pre-approval from pre-qualification and determines whether financing will actually come through once a property is under contract.

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Pre-Approval vs Pre-Qualification

These terms are often used interchangeably but represent very different levels of verification. Pre-qualification is a conversation. Pre-approval is verification.

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Why Pre-Approval Matters

Protects earnest money Once a purchase contract is signed, earnest money deposits (typically 1-3% of purchase price) are due within days. If financing falls through due to issues that should have been caught earlier, deposits may be at risk. Proper pre-approval identifies problems before contracts are signed, not after earnest money is deposited. Strengthens offers Sellers and listing agents recognize the difference between pre-qualification letters and verified pre-approvals. In competitive situations, strong pre-approval signals that financing is likely to close. Sets realistic expectations Verified pre-approval reveals actual purchasing power, not estimates. This prevents wasted time viewing properties outside actual price range. Speeds the process Much of the documentation work happens upfront during pre-approval. Once under contract, processing moves faster because verification is already complete.

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Documentation Required

Pre-approval requires documentation proving income, assets, and financial history.

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The Pre-Approval Process

Timeline: 1-3 business days with complete documentation. Delays occur when documents are missing or require clarification.

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What Pre-Approval Letters Include

A pre-approval letter typically states:

• Maximum loan amount approved
• Loan program (conventional, FHA, VA, etc.)
• Interest rate range (may or may not be locked)
• Expiration date (typically 60-90 days)
• Conditions (subject to appraisal, title, etc.)

Letters can be customized for specific properties with exact purchase price and loan amount when making offers.

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Common Issues Discovered During Pre-Approval

Pre-approval catches problems before they derail transactions: Income calculation differences Bonus, commission, and overtime income may not qualify the way borrowers expect. Lenders often average variable income over two years. Debt-to-income ratio limits Monthly debt payments relative to income may limit borrowing power below expectations. Credit issues Late payments, collections, or errors on credit reports may need resolution before approval. Asset sourcing Large deposits require explanation and documentation. Gift funds require specific paperwork. Employment gaps Recent job changes or gaps may require explanation or additional documentation. Discovering these issues during pre-approval allows time for resolution. Discovering them after signing a contract creates deadline pressure and risk.

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Pre-Approval Expiration and Updates

Pre-approval letters expire, typically after 60-90 days. Credit reports, income, and financial situations change over time. When updates are needed:

• Letter expires before contract is signed
• Job or income changes occur
• New debts are taken on
• Large purchases are made
• Offer price exceeds original pre-approval amount

Updating pre-approval requires current documentation and may involve new credit pulls. Notify loan officers of any financial changes during the home search.

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