A financial institution that offers mortgages, such as savings and loans, credit unions, banks and mortgage companies, can provide a pre-approval letter. The Uniform Residential Loan Application (HUD Form 1003) for mortgages on one- to four-unit single-family homes must be completed by the principal borrower and any co-borrower or co-signer who will be responsible for repaying the loan. The lender may charge an application and credit report fee for each borrower. The lender reviews recent income and asset documentation before issuing pre-approval.

The strong pre-approval letter states the loan amount and sales price the borrower qualifies for; the financing type, such as conventional or government-insured; and the loan arrangement the borrower has chosen, such as a 30-year fixed rate loan. It may also list a few of the main conditions needed to obtain a final loan approval to close the transaction, such as property title information, a satisfactory appraisal and a specific amount of buyer down payment.

On a purchase transaction, the pre-approval letter allows the borrow to compete for homes on the market. After the borrower enters into a purchase agreement with a seller, the lender will open the loan file and order the property appraisal, an inspection of the property and review of market activity to determine if it serves as sufficient collateral for the loan. On a refinance, where a new loan pays off and replaces a previous mortgage, the home must also be appraised for value.

After all parties involved in the transaction satisfy their portion of loan approval conditions, including appraisal, title research, escrow instructions and borrower financials, the lender reviews for compliance and issues final loan approval. This is the lender’s commitment to fund the loan because it has verified the necessary income, asset, employment and property information in accordance with its loan underwriting guidelines. The borrower meets with a Notary Public or escrow agent and signs all of the legally binding loan documents from the lender. The title is transferred once the borrower provides his share of closing costs and the loan funds.