Pre-Approval
Quick Definition
A lender's conditional commitment to provide a specific loan amount based on verified financial information.
Key Takeaways
- Pre-approval is stronger than pre-qualification — it involves verified documentation
- Get pre-approved before house hunting to know your true budget
- Pre-approval letters typically expire after 60-90 days
- Multiple pre-approvals within 14-45 days count as one hard inquiry on your credit report
What Is Pre-Approval?
Pre-approval is a formal evaluation by a lender in which a borrower's credit history, income, assets, and debt are verified to determine the maximum loan amount and estimated interest rate they qualify for. Unlike pre-qualification (which is an informal estimate based on self-reported information), pre-approval involves a hard credit inquiry and documentation review, resulting in a conditional commitment letter. In the home buying process, a pre-approval letter demonstrates to sellers that the buyer is financially qualified and serious, often giving them a competitive advantage in bidding situations. Pre-approvals are typically valid for 60-90 days and may need to be refreshed if the home search takes longer.
Pre-Approval Example
- 1A buyer gets pre-approved for $350,000 with a 6.5% rate, giving them confidence to house-hunt within budget.
- 2In a competitive market, a seller chooses the offer with a pre-approval letter over a higher bid without one.
- 3A pre-approval based on a $90,000 salary and 720 credit score results in a $375,000 maximum loan with 5% down.
Related Terms
Mortgage
A loan secured by real property used to purchase a home, typically repaid over 15 to 30 years.
Credit Score
A numerical rating (typically 300-850) that represents a person's creditworthiness based on their credit history.
Debt-to-Income Ratio (DTI)
A financial metric comparing monthly debt payments to gross monthly income, used by lenders to assess borrowing capacity.
Down Payment
An upfront cash payment made when purchasing a large asset, representing a percentage of the total purchase price.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
401(k)
An employer-sponsored retirement savings plan with tax advantages, often including employer matching contributions.
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