A pre-approval letter is a document from a lender based on certain assumptions, stating the maximum the lender is willing to lend to purchase a home. When applying for a mortgage pre-approval, the lender typically requires information about your credit, employment, income, debts, and assets to determine your creditworthiness.

Documents Needed for Mortgage Pre-Approval

Here is a brief overview of the documents you’ll need for the pre-approval process.

Proof of Income. Homebuyers generally need to provide W-2 wage statements for the two most recent years, pay stubs from the last 30 days, year-to-date income, and proof of any additional source of income, such as alimony or bonuses. Lenders will also want to review tax returns from the previous two years.

Self-employed applicants will be asked to submit business documents, such as profit and loss statements, Schedule C, K-1, or Form 1099, depending on the business structure.

Proof of Assets. You will need to provide bank and investment account statements proving that you have the necessary funds for a down payment and closing costs, as well as cash reserves.
Credit Record. Lenders often require a FICO score of 620 or higher to approve a conventional loan and 500 or higher for a Federal Housing Administration (FHA) loan.

The FHA guidelines allow approved borrowers with a credit score of 580 or higher to pay as little as 3.5% down. Those with scores less than 580 will need to make a larger down payment. Many lenders will work with borrowers with low credit scores and can offer suggestions to improve the score.

Employment Verification. Lenders want to know they are lending to borrowers with stable employment. So besides reviewing pay stubs, a lender will likely call the employer to verify employment and salary. And if a buyer has recently changed jobs, the lender may contact the previous employer.

Self-employed homebuyers will need to provide additional paperwork concerning their business and income. According to Fannie Mae, lenders want self-employed borrowers to produce documents showing income stability as well as the location and nature of the business.

Other Documentation. The lender will also want a copy of the borrower’s driver’s license (or passport) and Social Security number to pull a credit report.

How to Prepare for Mortgage Pre-Approval

To receive a pre-approval for a home loan, quite a bit of personal information is required. Here are some steps you can take to prepare for a meeting with a potential mortgage lender.

Check Your FICO score and Credit History. It is helpful to know your credit score before contacting a lender about a mortgage.

Request copies of your credit report and dispute any errors. If you find any delinquent accounts, work with creditors to resolve the issues before applying for a mortgage. Generally, a credit score of at least 620 is recommended. Credit scores greater than 620 can result in a better interest rate.

Calculate Your Debt-to-Income (DTI) Ratio. The debt-to-income ratio is the percentage of your gross monthly income (before taxes) that goes toward payments for rent, mortgage, credit cards, or other debt.

For example, if you pay $1,500 a month for your current mortgage, $100 a month for an auto loan, and $400 a month for the rest of your debts, your monthly debt payments are $2,000. If your gross monthly income is $6,000, then your debt-to-income ratio is 33%. Lenders prefer borrowers with a DTI ratio of 36% or less; however, many lenders will accept a DTI ratio of 43%.

Closing Thoughts

The homebuying process begins with becoming pre-approved for a mortgage. Then with a pre-approval letter in hand, real estate agents and home sellers know that you are a serious buyer.

To expedite the process of becoming pre-approved for a mortgage, check your credit report regularly for errors and keep the documentation you’ll need in a convenient and secure place.