You know you’ll need a mortgage to purchase a new home, but do you really need to apply for pre-approval? 


A pre-approval is an important first step in the home buying process. You’ll not only need it before you’ll be able to sign a contract on your new home, but it can also guide your decisions before you get too far in.

Learn more about what it is and how pre-approval can help you.

Learning How the Bank Sees You

Applying for a pre-approval is like applying for a mortgage before it really counts. You’re under no obligation to go with the bank that pre-approves you, but it gives you a better sense of what the bank sees when it looks at your ability to own a home. For instance, you’ll learn what interest rate you’ll get based on your credit score, and how much the bank thinks you can afford each month.

Most importantly, it can alert you to any potential problems you might have in the mortgage process. Some people don’t realize the bank doesn’t include bonuses and overtime pay when they decide how much to loan. Excluding this income can significantly decrease the amount you’ll qualify for. You might also learn your credit score is far lower than you thought. If so, you’ll have time to increase it before you actually need a mortgage.

mortgage rates
Understanding Your Pre-Approval 

Your mortgage pre-approval consists of two things: the interest rate and the maximum monthly amount the bank will allow you to pay. 

Your interest rate is based on your credit score. Most lenders separate borrowers into different tiers based on their scores – determining the type of mortgage you’ll get.  Those in the highest tier will get the best rates. Those in the range below will get slightly higher rates, and so on. You can ask the lender to tell you where your score falls in the range. If you’re close to the top of the range, you might consider working harder to bump your score up to the next level because you’ll be able to get a better rate.

People are often confused when the bank tells them the maximum monthly mortgage payment rather than a maximum mortgage amount. Banks do this because the monthly mortgage payment also includes homeowners’ insurance and property taxes, and these can vary depending on location. You can use a mortgage calculator to help you figure out how this monthly payment translates into a home price.

Making Smart Decisions 

The bank gives you a maximum monthly amount, but you also need to make smart choices. Is that an affordable mortgage? For instance, if you’re currently paying $1,200 a month for rent and just making ends meet, you might struggle if you take out a mortgage for the bank’s $1,600 a month maximum. 

Alternatively, the $1,600 a month might be affordable now, but will you be able to afford it when you have daycare or private school costs? Don’t forget to think about what the future in your new home will look like. It’s always best to choose a home that’s within an affordable range. Luckily, a good builder will be willing to work with you to find a beautiful new home that will fit well within your price range. 

Giving Proof of Income

Note: to get a pre-approval from a lender, you’ll have to provide proof of your income. Some lenders also provide pre-qualifications, which are rough estimations of how much money they’ll loan you. However, pre-qualification is only based on self-reported income and credit. The pre-approval requires vetting, so if the bank doesn’t ask you for proof of your income, you’re not getting pre-approved.

A Conditional Offer

The mortgage pre-approval you get from the bank is a conditional offer. With pre-approval, you can make an offer on a home or work with a home builder to design a home that meets your needs. It’s technically an offer for a mortgage, but there are conditions. The offer doesn’t last forever. It may only be valid for 30, 60, or 90 days. After that, rates can go up. Additionally, the offer can change if your financial situation changes. The bank will verify your information again just before you close on the home.

The mortgage pre-approval takes a little bit of time, but it’s well worth it in the end. If you’re almost ready to buy your home, it’s time to head to the bank for this first step!