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An NYC Buyer’s Guide To Mortgage Pre-Approval

Mortgage Pre-Approval

Mortgage pre-approval is when you apply for a mortgage, and based on your credit score and financial standing, the lender will approve your mortgage application and issue you a letter stating that they will lend you a certain amount of money if you meet their conditions.

The pre-approval letter is usually valid for about 90 days (sometimes 60 days), and it shows the seller that you are a serious buyer that can afford the apartment they are selling. 

Mortgage pre-approval usually requires a “hard” credit check, which becomes part of your credit history and may affect your credit score.

Is Mortgage Pre-Approval Legally Binding?

A mortgage pre-approval is not legally binding for you (the borrower), but it might be for the lender. The pre-approval is the lender’s “conditional commitment” to give you a mortgage loan. This means that if you meet all the conditions stated in the pre-approval letter and there is no significant change in your financial standing, the lender may be obligated to give you the interest rate and loan amount they have stated in the letter.

But the approval letter doesn’t legally bind you to the lender. Once you have decided on a property, you can shop around for better mortgage rates and terms. The only difference would be that with a new lender, you will have to resubmit all your financial documents.

Mortgage Pre-Approval vs. Mortgage Pre-Qualification

Mortgage pre-qualification is usually just a calculation of how much loan you can qualify for based on the financial information you provide to them. It doesn’t require you to submit your financial documents, and the soft credit check it requires doesn’t affect your credit score. It simply gives you an idea of how much mortgage you can afford.

Pre-approval is more thorough and requires you to submit your financial documents and triggers a proper credit check. Pre-approval is also for the benefit of the sellers, so they see you as a serious bidder, while pre-qualification is just for you. There are some banks, however, who use these words interchangeably. Make sure you confirm with the bank to see what the difference is.

How Can You Get Pre-Approved For A Mortgage?

You have to fulfill the mortgage requirements, submit the necessary documentation, and follow the directions of a lender to get pre-approved for a mortgage. You can get pre-approval letters from multiple lenders or get a new approval letter when the first expires (after 60 or 90 days), but that’s not recommended.

Each new pre-approval means a new hard credit check that can negatively affect your credit score. If you don’t have a great score, it may be difficult to qualify for a mortgage, and/or you will get higher mortgage rates. 

Therefore, you may consider working with a mortgage broker, even for pre-qualification. They will help you shop around for the best rates (based on your finances and credit history) and connect you with the lender best suited for your mortgage needs.

While mortgage brokers can help you get a pre-approval letter, they may not be able to issue you one themselves because they are not lenders or financial institutions. You can also work with a broker after you have secured a pre-approval letter or when you are shopping around for better rates after deciding on a property.

The most common documents needed for a pre-approval are the following:

Proof of Income: The lender needs to ensure that you have enough income to cover your mortgage payments, so they require proof of income documents. This usually includes W-2 forms going back two years, tax returns, and bank statements of the past two years. The requirements are more difficult for freelancers since banks are worried about their income stability.

Employment Verification: Some lenders may also require employment verification. This includes an employment verification letter and, sometimes, pay stubs for the past two years. The lender may also contact your employer for additional verification.

Proof of Assets: When it comes to assets, the lender will be most interested in the financial assets needed to cover your down payment and closing costs. For that, they will look into your cash reserves. If you received the down payment money from friends or family, you may need to provide a gift letter. This tells the lender that the amount you have received is not a loan that you will have to pay on top of your mortgage (which will affect your Debt-to-Income ratio).

Identity Documents or Other Documents: The lender will also require your driver’s license and your social security number. They may also ask for your signature to pull your credit history.

While it’s not a document, your pre-approval lender will also look into your credit history and score. The higher your credit score is, the better. Ideally, 700 or more, but you might get decent rates with 680 as well. And while you might be able to buy an apartment in NYC despite having bad credit, it will not be easy.

It’s important to understand that there is no real difference between mortgage pre-approval requirements and mortgage “approval” requirements. The lender will assess your finances the same way when they are approving an actual mortgage (once you have decided on a property) as they would for pre-approval.

You will need enough financial assets, a decent and stable income, a healthy Debt-to-Income ratio, and a good credit score to qualify for good mortgage rates.