Understanding the Pre-Approval Process


Shopping for a loan is important before you start shopping for your dream home.

Pre-qualification” and “pre-approval” sound like the same thing, but they are not.

The loan approval process is quite straightforward, as long as you understand a few key points:

Pre-qualification is the first step you can take.

  • Find out how much a bank will loan you so that you can shop within your price range
  • Most banks and credit unions will do this over the phone
  • A loan officer will ask you about your income, assets, debts and projected down payment –> calculates what kind of loan you’d likely qualify for. The process takes just a few minutes.

Pre-approval is more involved and usually requires an appointment.

The lending institution gathers all the information it requires to offer you a loan, and your credit report will be checked; you may be charged a fee for this at the time of the appointment. You’ll need to bring some items with you to document your identity and your assets:

  • A copy of your most recent bank statements (this includes your daily checking account as well as any money market, savings or other accounts)
  • Your most recent W-2 (or entire tax return if you’re self-employed)
  • Proof of IRAs or retirement accounts and their current balances
  • Stocks or mutual funds you own outside of retirement accounts
  • Your driver’s license
  • The most recent month’s paystub(s)
  • An application fee (this depends on the lender)

The result of the pre-approval process is the good faith estimate.

If the bank looks you over and likes what it sees, you’ll receive a good faith estimate (GFE)

-> Brief document spelling out the likely terms of the loan, including the interest rate, loan type (fixed-rate, adjustable and so on) and closing costs.

You might want to complete the pre-approval with a few lenders in order to compare terms among lenders.

It pays to compare for a loan as large as a mortgage, for example the interest rate can make a big difference. To negotiate for a great interest rate, reduced closing costs, or lender-paid private mortgage insurance, you have to make lenders compete with each other. (Lining up GFEs is also a good way to spot lenders who charge unnecessary fees.) Don’t just accept the first offer you get — make sure it’s a good one.

Pre-approval does not mean the bank guarantees you the loan.

  • It means that you’re approved to get a loan — unless something goes wrong
  • Commitment to the loan generally comes after the bank has had the house in question appraised
  • Banks also check to make sure the home has a clear title and that you’ve insured it for replacement value.


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