Banks and other lending institutions provide pre-approval letters for loans. The application process usually involves a full credit report check and disclosure of financial information, such as the two previous years' pay stubs, W-2s and bank account statements. After reviewing the information, the bank or other institution may issue a pre-approval letter if it determines that lending guidelines are met. Borrowers provide additional financial information when applying for the loan.
Pre-approval letters are used when a borrower needs a mortgage in order to purchase a home. They state that the bank has determined that the borrower can qualify for a certain loan amount based on the borrower's assets and income and the bank's lending policies. Pre-approval letters are usually valid for 60 to 90 days.
A pre-approval letter does not guarantee that the bank will give a borrower a loan. Since financial situations can change quickly, the terms of the loan, such as the interest rate or the amount, are not guaranteed. However, a pre-approval letter is still useful because it shows sellers and realtors that the borrower is serious about purchasing a property. It also gives borrowers a more accurate estimate of how much real estate they can afford.