Updated May 10th, 2019
When you’re seriously shopping for a house, getting a pre-approval letter is one of the best decisions you can make. Although a rather quick and painless process, chances are you have a few questions when it comes to the pre-approval process, such as, “How long does a mortgage pre-approval last?”
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How long does a mortgage pre-approval last?
Once pre-approved, your pre-approval letter typically lasts 60-90 days before you have to get a new one. While this may seem like a long time upfront, it doesn’t allow for a leisurely stroll through weeks of open houses to find something that may work. Finding the house that you want to spend time in (and a lot of money) takes a bit of time, so you’re going to want to move as quickly as possible.
Can I get a pre-qualification letter instead of a pre-approval letter?
A pre-qualification letter is basically as good as shooting the breeze with a loan officer. You give them information and they’ll give you a hypothetical interest rate and monthly payment based on that information. It’s cut and dry and serves as a pretty good benchmark when you are first getting into the home search process. If you are planning on getting serious about buying a house, though, you’ll want to get a pre-approval letter before house hunting.
A mortgage pre-approval letter is a precursor to a mortgage loan. The pre-approval letter states that your lender has gone through a more extensive process and that you are past the first round of investigations needed to buy a home with a loan.
The pre-approval letter gives sellers peace of mind knowing that you have begun the loan process and are so far cleared to get a loan.
Why do pre-approval letters expire?
Being on a timeframe to make a decision as large as purchasing a house doesn’t really seem fair. So why do pre-approval letters expire?
To Create a Debt-to-Income Ratio Check
Often, when people are looking to buy a house, they’re also looking to make some other large purchases in their life. Purchases such as a new car or financing furniture can add to their debt-to-income ratio.
This debt-to-income ratio helps your mortgage lender gauge how risky of an investment it is for them to lend money to you. Remember, they make their money off of you paying your payments with interest every month. If you aren’t able to make those payments, they lose out on their investment.
To avoid getting a potential borrower that begins the month with excellent debt-to-income ratio and ends the month with multiple monthly payments, lenders place an expiration date on their pre-approval letter.
Locked-In Mortgage Rate
While your real estate agent will probably want you to go with a lender they are working with, you have the option (and are strongly encouraged) to shop around. While shopping around, you may find an interest rate that you believe is phenomenal and the lender will lock you in at that interest rate in your pre-approval letter.
Interest rates rise, though, and to prevent you from taking too long in the buying process, that expiry date on your pre-approval letter acts as a hastening mechanism designed to help you choose a home before that interest rate expires with the letter.
What to Do When Your Pre-Approval Letter Expires
If your house-hunting process is taking a bit longer than planned, you’ll likely need to renew your pre-approval letter. To renew it, you can take it back to your lender, supply updated bank statements and pay stubs, and they’ll crunch the numbers again. It’s typically a quick process, and you’ll soon be out hunting for houses again soon.
Many people wonder if re-applying for mortgage loan pre-approval makes your credit go down. The answer is yes, but it shouldn’t be significant.
Most checks on your FICO score are known as “hard checks.” These hard checks raise a flag that is then listed on your credit report. Too many of these flags, and you could be disqualified from getting a loan.
While having one or two checks on your credit report—especially when applying for a mortgage—isn’t that big of a deal, it does temporarily lower your credit score. It can lower your score from a few points to 14 or more points, depending on your initial score and the number of payments you are making.
To prevent your pre-approval process from causing any significant stress to your credit report, you can pull a soft report (one that doesn’t ding your credit) at home from a site like Credit Sesame. If your report is lower than 620, you’ll likely want to hold off purchasing a house until you raise it a bit.
The Pre-Approval Process
The pre-approval process begins before approaching a mortgage broker about getting a pre-approval letter.
Before Going to a Lender
Before going out and searching for houses, determine what you can feasibly pay out each month toward your house. You can base that off of your debt-to-income ratio by tallying up your total monthly income and subtracting your total monthly debt from that number. Make sure to factor in your monthly spending budget, as you’ll still need food after you buy your house.
Another way you can determine the amount you feel comfortable with putting toward the mortgage each month is by looking at your current budget. If you spend $1,200 toward rent right now and would feel comfortable spending up to $1,800 per month, but not $2,000, then you know your personal limit.
Once you know that range of numbers, you are ready to put all of this information into a mortgage calculator. The mortgage calculator gives you a few numbers such as an interest rate and monthly payment amount based off of what the average person in your situation can afford when buying a house. This is all helpful information, but it does not guarantee you a loan.
After that, you are ready for the lender side of the pre-approval process.
Mortgage Broker Pre-Approval Process
Getting pre-approved for a home loan doesn’t take very long but does require a bit of information up front. You’ll need to print off your bank statements for the last few months and provide your lender with a pay stub or two. Your lender will also want to see the last two years of tax returns. They’ll take that information and run a check on your credit history.
From there, your lender will typically run your information through automated underwriting software. This software runs all of the data your lender has on you against the loan options available to see which one is a fit.
If you have a good credit score (between 620-640 to 800), and a low debt-to-income ratio, you’ll typically get an “Approve” on your letter. If you have a lower credit score and a high debt-to-income ratio (from a maxed out credit card or multiple loans). A few loans, such as an FHA loan, have lower barriers for approval, with higher interest rates and other stipulations.
Does a pre-approval letter guarantee me a loan?
Some people think that a pre-approval letter guarantees them a loan. This is false. The pre-approval letter simply states that you have begun the approval process and are so far good to go. There are many things that will factor into the loan and your lender won’t officially guarantee you a loan until the final signature is on the loan documents.
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You’ve got your pre-approval letter and are ready to make an offer on a house. An expert real estate agent like those at Clever will help your dreams of getting your home to be a reality. Call us today at 1-833-2-CLEVER or fill out our online form to get started.