What is a pre-approval in the context of mortgage lending?

A pre-approval in the context of mortgage lending refers to a process where a lender evaluates a borrower's creditworthiness to determine how much money they are likely able to borrow. This involves the lender reviewing the borrower’s financial situation, including credit score, income, debts, and assets.

When a borrower seeks pre-approval, they provide the lender with necessary documentation, such as pay stubs, tax returns, and bank statements. The lender then analyzes this information to give the borrower an estimate of how much they can afford and what types of loans may be available to them. This step helps borrowers understand their financial position before home shopping and signals to sellers that the borrower is a serious candidate with financial backing.

This clarity and early assessment are essential in the home-buying process; it allows borrowers to narrow their search to properties within their budget while also enhancing their credibility in the eyes of sellers who may prefer to negotiate with buyers who have secured financing pre-approval.