What is the purpose of a pre-approval in the mortgage process?

A pre-approval in the mortgage process serves the essential function of estimating the loan amount for which a borrower can qualify. This is achieved through a preliminary evaluation of the borrower's financial status, including income, credit history, and existing debts. During this process, the lender assesses the borrower's creditworthiness, which helps to inform them and potential sellers about the borrowing limits.

This estimated loan amount is critical for borrowers as it gives them a realistic perspective on what they can afford, allowing them to narrow their property search accordingly. While it involves an examination of the borrower's financial health, it does not guarantee loan approval since final approval depends on further verification and a thorough review of the application once the borrower has found a property they wish to purchase. Consequently, it also does not finalize closing costs, which are determined later in the process, once a property is selected and a full application is submitted.