What a pre-approval is, and what it isn't

The short version

A pre-approval is a conditional yes, in writing. I issue the letter after two things have happened: I've reviewed the documents you supplied, and an underwriting decision has come back, either automated or from an underwriter. Either way, the credit decision isn't mine to make, and the decision behind the letter is conditional. The final one comes later, in the lender's underwriting.

That's why the letter tells you, and the sellers you make offers to, that someone has checked your finances rather than taking your word for them.

Lenders use the words differently. Some call a quick conversation a pre-qualification and a documented review a pre-approval, and neither one is a commitment to lend. Whatever a letter is called, the useful question is the same: what was actually checked?

What gets looked at

Most pre-approvals come down to four things.

• Income, and how steady it has been
• Assets for the down payment and closing costs, and on some loans, money left over afterward
• Credit history
• The monthly debts you already carry

Credit checks

A credit check can lower a score a little, and several mortgage checks in a short window generally count as one.

What it isn't

It isn't a final approval, and it isn't a commitment to lend. Before closing, the loan still goes through final underwriting, the home is generally appraised, title is checked, and your finances need to look the way they did when the letter was issued.

A pre-approval doesn't lock a rate, either, and letters have an expiration date.

Keeping it good until closing

Between the letter and closing, check with me before you open new credit, move large sums of money around, or change jobs. Each of those can change the picture the letter was based on.

The Consumer Financial Protection Bureau explains how the two letters differ on its own page.

Words in this lesson