How to Get Pre-approved for a Mortgage

Getting pre-approved allows you to negotiate on better terms with the seller.

1. Before shopping for a home, let lenders compete for your mortgage pre-approval terms.

Getting pre-approved for a mortgage is one of the most important factors in your home buying process. Lack of financing or a delay in financing will affect your bargaining position after spending weeks or months looking for a perfect home. Obtaining pre-approval allows you to shop for a home in the correct price range and be able to negotiate on better terms with the seller.

2. Understand the difference between pre-approval and pre-qualification

A pre-approval letter is one of the most important documents you will receive during your home buying process. The process of pre-approval is more involved and challenging than pre-qualification. Mortgage pre-qualification allows you to quickly shop for better terms from lenders. Mortgage pre-approval results in a letter from a lender with much more specific terms for a future mortgage. Eventually, mortgage pre-approval is an instrument that allows you to make a competitive offer on a home.

3. Sharpen your personal finances to get the best mortgage terms

One of the most important financial factors in the mortgage terms you may get is the employment history for the past two years including income for borrower and co-borrower. You may also need to organize some basic documents that include checking and savings accounts, records of any investments, list of assets and liabilities. This is also a chance to resolve any issues on a credit report, pay down loans and make sure you have enough funds for your down payment. This is a good time to have as much cash on hand as possible.

4. Find mortgage lenders who offer the best rates

The mortgage is one of the most expensive homeownership lifecycle items on your list. By the time you pay off the mortgage, you have paid the amount twice: principal plus interest. It is typically recommended to get pre-approval from at least three lenders so you can compare the interest rates, fees, and general terms. There are direct lenders and mortgage brokers you can work with. Mortgage brokers will shop around for your best options with direct lenders and lenders typically pay an origination fee to a mortgage broker if you sign you as a client.

The mortgage broker fee is typically 100-120 base points on principal (meaning, 1%-1.2% of your principal.) You may also approach a direct lender to avoid the burden of this mortgage origination fee, which may result in better terms. However, mortgage brokers may receive slightly better terms from direct lenders despite having to pay this fee due to mortgage brokers' volume advantage and convenience. There are different types of mortgage loans you may qualify for including fixed-rate, adjustable rate, FHA, etc. Typically in a mortgage, you are looking for low or no origination fees, better rates, flexibility, and consistent terms for the longest period of time. This type of mortgage may come with a higher down payment, but it will also provide you a better ROI (Return on Investment) on your real estate asset. Mortgages with lower down payment and adjustable rates are much less attractive and may cost you either higher interest payments, lower ROI, or a greater chance in a loss of equity during an economic downturn.

5. Pre-approval timing

Pre-approval letters typically expire within 60-90 days. As soon as you get pre-approved, make sure to find a real estate agent to help your house search. Once you have secured the pre-approval letter, you have 90 days to look for a home, although you may re-apply for another pre-approval letter again easily if the process takes longer than expected.

6. Negotiate your buyer's refund before hiring a real estate agent

Buyer's real estate agents never work for free, they receive a commission offered by the seller (seller will typically offer buyer's real estate agent a 2.5%-3% buyer's agent commission, but the seller is not obligated to so.) In 40 States you are able to negotiate a buyer's refund with your buyer's agent as a cash payment upon closing from that amount. Competitive buyer's agents will offer such terms to clients in order to gain more business.

Buyer's refunds are issued free from an income tax burden. Home buyers refunds make buying a home less expensive and provide you better bargaining power with a seller over another buyer who does not have a buyer's refund negotiated with their agent. Depending on the refund terms with your agent and the final value of a bought home, buyer's refund may come back to you in thousands, tens of thousands and, in extreme cases, hundreds of thousands in fees. This very important step is often missed because the majority of the real estate industry is built on uncompetitive “standard” fees. In the end, the entire commission paid to all agents in your home purchase is incorporated into the buyer's mortgage sum. To negotiate a buyer's refund is an equivalent of receiving your own money back, which is why the IRS does not treat your buyer's refund as income.

7. Buying a home without a real estate agent

You may choose to make an offer on a home without a real estate agent representing you, but this is a risky decision. Real estate agents are bound by State law to represent you and will help you to make a good offer. If you decide to skip the help from a qualified buyer's agent, you will not be able to negotiate a buyer's commission refund and the listing agent will typically keep all commission (this is known as dual agency.) This means that you will not be represented, but you will effectively pay for all commission anyway as part of your final mortgage sum. Sometimes you may be asked to pay your buyer's agent out-of-pocket (for example, if you are making an offer on an FSBO (For Sale By Owner) listed home.)

8. Apply for pre-approval

Almost every reputable lender is now able to offer a digital mortgage application process. You will typically need to gather all basic documents including ID's, W2 forms, pay stubs, tax returns and apply for a pre-approval using a process required by each lender.

9. Get pre-approved

This is the start of your journey. On this journey, don't forget the meaning of home. When things get tough, take a time out and notice that you are alive.