Preparing Your Finances for a Mortgage Pre-Approval

20 June 2025

Buying a home is one of the biggest financial decisions you'll ever make. But before you start browsing listings and attending open houses, there’s an essential step you can't skip—getting pre-approved for a mortgage. This crucial step not only determines how much you can afford but also gives sellers confidence that you're a serious buyer.

However, mortgage pre-approval isn’t just a quick formality. Lenders will scrutinize your financial situation like a detective examining a crime scene. If your finances aren’t in order, you could end up with a lower loan amount or, worse, a rejection. So, how do you prepare to ensure a smooth and successful pre-approval process? Let's break it down step by step.

What is Mortgage Pre-Approval and Why Does It Matter?

A mortgage pre-approval is when a lender evaluates your financial background—credit score, income, debt, and assets—to determine how much they're willing to lend you. Unlike pre-qualification, which is more of a rough estimate, pre-approval is a thorough assessment that carries more weight with sellers.

Here’s why it matters:

- Stronger Negotiating Power – Sellers are more likely to take your offer seriously if you have a pre-approval letter.
- Know Your Budget – It helps you avoid shopping for homes outside your price range.
- Faster Closing Process – Since much of the financial vetting is already done, the mortgage approval process moves faster.

Now that you know why pre-approval is crucial, let’s dive into how to get your finances in top shape.

Step 1: Check Your Credit Score and Improve It If Needed

Your credit score is one of the biggest factors lenders consider when determining your loan eligibility. The higher your score, the better your mortgage terms and interest rate will be.

How to Check Your Credit Score

You can check your credit score for free through various online platforms like Credit Karma, Experian, or directly from the credit bureaus (Equifax, TransUnion, and Experian).

Tips to Improve Your Credit Score

- Pay Your Bills on Time – Late payments can hurt your score significantly. Set up auto-pay to avoid missing due dates.
- Reduce Your Credit Utilization – Try to keep your credit card balance below 30% of your total credit limit.
- Avoid Opening New Credit Accounts – Each new credit inquiry can temporarily lower your score.
- Dispute Any Errors on Your Credit Report – Mistakes happen! If you find an error, dispute it immediately to clear up your credit history.

If your credit score is low, don’t panic. Improving it takes time, but even small improvements can make a big difference in your mortgage approval odds.

Step 2: Assess Your Debt-to-Income (DTI) Ratio

Your Debt-to-Income (DTI) ratio is the percentage of your monthly income that goes toward paying debts. Lenders use this to determine whether you can afford a mortgage payment on top of your existing obligations.

How to Calculate Your DTI

DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100

Most lenders prefer a DTI below 43%, though the lower, the better.

How to Lower Your DTI

- Pay Off High-Interest Debt – Knock out credit card balances and high-interest loans first.
- Avoid Adding New Debt – Hold off on big purchases like a new car until after you get the mortgage.
- Increase Your Income – If possible, take on extra gigs or negotiate a raise to reduce your DTI ratio.

Lenders want to see that you have enough wiggle room in your budget to comfortably handle a mortgage payment.

Step 3: Save for a Down Payment and Closing Costs

Lenders typically require a down payment—which can range from 3% to 20% of the home’s price, depending on the loan type. In addition to that, closing costs usually run between 2% to 5% of the loan amount.

How to Build Your Savings Faster

- Set Up a Dedicated Savings Account – Keep your house savings separate to prevent spending temptations.
- Cut Unnecessary Expenses – Do you really need that subscription you never use? Trim the fat from your budget.
- Automate Your Savings – Set up automatic transfers to make saving effortless.
- Consider Alternative Funding Options – You may qualify for first-time homebuyer grants or down payment assistance programs.

The larger your down payment, the better your loan terms will be, so it’s worth making every penny count.

Step 4: Gather the Necessary Financial Documents

Lenders will ask for a mountain of paperwork during the pre-approval process, so it’s best to be prepared ahead of time.

Common Documents You’ll Need

- Proof of Income – Pay stubs, W-2s, or tax returns for the past two years.
- Employment Verification – A letter from your employer confirming your job status.
- Bank Statements – Typically the last two to three months of statements from all accounts.
- Debt Statements – Loan and credit card statements showing your balances and payments.
- Identification – A valid government-issued ID.

Having everything ready will make the pre-approval process smooth and stress-free.

Step 5: Avoid Major Financial Changes

Once you start the pre-approval process, it’s crucial to keep your financial situation stable. Lenders don’t like surprises.

Things to Avoid Before Getting Pre-Approved

- Making Large Purchases – Buying a car or new furniture can change your debt-to-income ratio.
- Switching Jobs – Lenders want to see stable employment history. A job change might delay or derail your approval.
- Taking Out New Loans or Credit – Any new line of credit can impact your credit score and loan eligibility.

Think of the pre-approval period as a financial holding pattern—keep everything steady until you secure the loan.

Conclusion: A Strong Financial Foundation is Key

Preparing your finances for a mortgage pre-approval isn’t just about impressing lenders—it’s about setting yourself up for long-term financial success. By improving your credit score, managing debt wisely, saving diligently, and keeping your finances stable, you’ll not only get pre-approved but also land the best possible mortgage terms.

So, before you start house hunting, take the time to get your financial house in order. Your future self (and your dream home) will thank you for it!