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Things Grown-Ups Know: Getting Pre-Approved

If you’re a normal millennial, you’ve heard terms like “refinancing” and “taxable annuities” and “lender pre-approval” thrown around in adult conversation at networking events and breakroom lunches, and for the most part you nod your head and stare into your GMO-free organic vegan salad to avoid saying something you don’t really know anything about. My dear aspiring homeowner, today we’ll learn about what getting pre-approved for a mortgage loan means, and you’ll be one-step closer to being a grown-up!


Let’s go back to basics. Buying a house is usually the largest purchase you’ll ever make. Most of us don’t have $200,000 lying around in bank accounts or under mattresses, and unless you have a wealthy Victorian benefactor or recently deceased prosperous great-aunt, you have to borrow the money from a bank or credit union when you purchase a home. Banks, as you know, won’t just give anyone on the street a pile of cash. They have carefully vetted risk models to rate your loan-worthy status based on credit history, credit score, income, assetss–basically whatever they can think of to judge you by so that they can entrust you with their money and gauge the probability of getting their money back from you.


Before you start shopping for your home, you should go to a bank, credit union, or online lender and submit an application for pre-approval. Typically, they’ll ask for proof of income (pay stubs, two years’ of W-2s, two federal tax returns, and two months of bank statements). They’ll also pull your credit report, verify employment, and make copies of your driver’s license and social security card. But it sounds so serious and scary, you say! Don’t be worried—this is standard procedure for loan pre-approval, and every homebuyer does this. You should only be worried if the lender ask for your phone number and if you’d like to go salsa dancing on Friday.


You can discuss loan options and budgeting, interest rates, and most importantly, you’ll figure out the maximum you can borrow. This will help you determine what your house-shopping budget is, which will direct your house-hunting efforts. Sorry McMansion, but a two-bedroom townhome it is! Once you’ve submitted your application and all necessary documents for verification, the lender will provide you with a letter showing how much they’ve approved for lending and the basic terms. Remember, preapproval isn’t necessarily a loan commitment, but definitely speeds up the underwriting and loan approval process once you’ve submitted an accepted offer on your dream house.


Why even go through the hassle of pre-approval if you have do it later for a loan anyway? Simply, it saves you time in the long run. Most owners and their agents don’t accept offers unless you’re preapproved, and it’s not just because they like to be judgy. For you, it’s an important step in finding an accurate and affordable price range for targeting your search. For sellers and agents, it’s a clear sign that you’re a credible buyer. Having a pre-approval letter can make the difference between two similar offers. It will definitely label you as someone who knows what terms like “air pocket stock” and “marquee asset” mean in conversation. You know, grown-up talk.


If, for some reason, you can’t get pre-approved for a loan right away, there are several steps you can take to improve your credit score and help bump you into a lower-risk category for lenders, which we will learn about in a different post. Remember, in the house hunting game, it pays to be prepared—not only for your dream house, but for any water cooler conversations involving grownups.