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For most buyers, getting preapproved for a mortgage is an essential part of the journey to homeownership. Preapproval gives you an idea of how much money you can borrow, targeting your search for a home. When you get preapproved, a lender says it’s willing to provide a mortgage for a stated maximum and at a stated interest rate.
A sign of creditworthiness, preapproval shows sellers that you’re serious about buying and banks are serious about lending, which makes your offers more appealing.
In short, preapproval from a lender is an essential tool while shopping for a home. Getting preapproved for a home loan depends on various factors, including your credit score, income and other financial data. Here’s how to make it happen.
What is a mortgage preapproval?
A mortgage pre-approval is a statement, usually a document or letter, of how much money a lender is willing to let you borrow to pay for a home. The preapproval indicates that the lender is prepared to move forward with the loan as long as the home meets certain criteria and your financial situation doesn’t change drastically while you look for a home to purchase.
The preapproval is based on your financial profile, including your income, how much money you have in the bank and investment accounts and your debts. The lender performs a hard credit inquiry as part of the preapproval process, as well. With this information, the lender can make an informed estimate about how much house you can afford and, if you qualify, can preapprove you for a specific loan amount.
Preapproval vs. prequalification
Preapproval and prequalification are similar terms but different in crucial ways.
Prequalifying for a mortgage is a less strenuous process that gives you an idea of the sort of financing you might be able to get. However, lenders usually only use a soft credit pull and don’t verify the information you provide.
Preapprovals require more underwriting and are more solid indications of your ability to get a mortgage than a prequalification. That makes them more useful when you’re looking to make an offer on a home and want to show sellers that you can afford the purchase.
How to get preapproved for a home loan
1. Choose a mortgage lender
In order to get the best rates and fees, it is important to shop around before you select a lender for your preapproval.
It’s in your best interest to investigate different options to determine who has the lowest rates and fees — and maybe even apply in more than one place. Getting preapproval from multiple lenders not only may land you a lower rate, but it can also give insight into how a lender handles mortgage loans, what kind of fees they charge and a general overview of its customer service. Just be ready to deal with the preapproval process multiple times.
2. Gather personal and financial documents
To get preapproved for a mortgage, you’ll need to supply documentation about your income, assets and debts. These documents typically include the following:
- Pay stubs from at least the past 30 days
- W-2s from the past two years
- Proof of any other income sources (such as bonuses or commissions, child support or rental revenue)
- Account statements, including checking, CDs and retirement savings, from at least the past two months
- Documents detailing any loans you currently have
- Letters explaining any new loans you’ve taken out recently
- Letters from anyone giving you a gift to use for a down payment
- Court records if you’re recently divorced or dealt with something like bankruptcy or foreclosure
- Contact info for your landlords if the lender wants to verify payment
- ID (such as a driver’s license or passport), so lenders can verify your identity and that you’re a U.S. citizen. Foreign nationals can get financing, but it’s much more complicated.
Those who are self-employed might also need to include additional information and undergo an income audit. This might include asking an accountant to verify your income is stable by speaking with customers; reviewing business records, like P&L statements; or taking other steps. Your lender can let you know what’s required if you’re self-employed.
You’ll need to share this information with any lender you’re applying for a preapproval with, so it’s best to have it all organized before you start seeking offers.
3. Check your credit report
In addition to providing documentation, you’ll also have to agree to a hard credit check by the lender. It’s important to check your credit report before your lender does, in case there are errors that could impact not only whether you get preapproved but also your ability to get the best mortgage rate.
If you are seeking a conventional mortgage, you’ll need a credit score of at least 620 to qualify. But that’s a bit like saying a D is a passing grade. Ideally, you’d want a much higher credit score to get the best loan terms.
Credit bureaus consider your credit very good if your score is between 740 to 799, and if you have 800 or more, your credit is considered excellent. Having credit in these thresholds could mean a significantly lower interest rate than a credit score in the “good” range. The higher your credit score, the lower your interest rate on a mortgage.
If you don’t have a high credit score, you may still qualify for preapproval if you try a federally-backed or specialized loan program, like an FHA loan, that allows for a lower credit score, such as 580.
Under federal law, you’re entitled to a free copy of your credit report from each credit bureau once per year. These can be obtained at AnnualCreditReport.com.
During the credit check, the lender will look at your credit report and history to assess your credit utilization ratio — which is basically the outstanding balances on all your credit cards, and how close they are to your total credit limits. The lower your credit utilization ratio is, the better your chances of getting preapproved.
4. Get preapproved
Most lenders offer flexibility when it comes to filing for preapproval, allowing applicants to complete the process in person or online.
In assessing your application, many lenders use the “28/36” qualifying ratio to figure out what monthly payment you can afford. In general, lenders like to see a mortgage payment taking up no more than 28 percent of your gross monthly income and your total debt payments (which includes credit cards, car loans and other obligations in addition to your mortgage) accounting for no more than 36 percent of your gross monthly income.
Once the lender assesses your credit and financial profile, it’ll make a determination as to whether you’re preapproved for a mortgage and for what amount. If you are, you’ll be issued a preapproval letter stating this information.
Mortgage preapproval timeline
There are many steps involved in a preapproval process. If you start early, stay organized and keep abreast of your application process, the quicker your preapproval will go. And the sooner you get it, the sooner you can begin serious house-hunting.
When should you get a mortgage preapproval?
The best time to get a mortgage preapproval is before you start looking for a home. If you don’t and you find a home you love, it’ll likely be too late to start the preapproval process if you want a chance to make an offer.
Many sellers want to see a mortgage preapproval letter as part of your bid, and certainly before they enter into a contract with you.
As soon as you know you’re serious about buying a home — that includes getting your finances in home-buying shape — you should apply for a preapproval from a trusted lender.
How long does it take to get preapproved?
Depending on the mortgage lender you work with and whether you qualify, you could get a preapproval in as little as one business day, but it usually takes a few days or even a week to receive — and, if you have to undergo an income audit or other verifications, it can take longer than that.
In general, if you have your paperwork in order and your credit and finances look good, it’s possible to get a preapproval quickly.
How long does a preapproval last?
Many mortgage preapprovals are valid for 90 days, though some lenders will only authorize a 30- or 60-day preapproval.
If your preapproval expires, getting it renewed can be as simple as your lender rechecking your credit and finances to make sure there have been no major changes to your situation since you were first preapproved. Just keep in mind that this might count as another hard pull against your credit, dropping your score by a few points.
Why should I get preapproved?
Today’s housing market is slightly cooler than it was six months ago, as home prices slightly decline (or register smaller gains) and mortgage interest rates continue to rise. However, getting preapproved is still important. While it’s less of a seller’s market, many homeowners still will not consider your offer unless you have it (unless you intend to pay in cash, of course). They want to be sure you won’t fail to get financing, thus killing the deal.
Even in a less-frenzied market, the process of preapproval can still help you save time during house-hunting by targeting your search and eliminating properties out of your price range. By getting preapproved by multiple lenders, you may end up paying less in interest rates. And you become a savvier consumer: Comparing lenders allows you to learn about different fee structures, timeframes for closings and a lender’s customer service. All valuable pieces of information before you commit to doing business with them.
Next steps to get a mortgage
What to do after you are preapproved
Let the search begin! House-hunting with a preapproval letter provides a tool to show you are serious about purchasing a home, and financially equipped to do so.
Preapproval letters are valid for a specific period such as 60 or 90 days, so it helps to have a timeline for finding a home. Don’t wait too long after receiving your preapproval to go house-hunting. If your financial situation changes drastically or the home you want doesn’t pass an inspection, you might not get the mortgage you were preapproved for.
After you find the right home and make an accepted offer, it’s time to officially apply for a mortgage. Even with preapproval, the process may take several weeks, as the lender thoroughly checks you out and the home as well, conducting an appraisal to determine its fair market value.
While you’re waiting, continue to monitor mortgage rates. Remember, your preapproval doesn’t lock in a specific rate. You must have completed a mortgage loan application for a rate lock.
What to do if you can’t get preapproved
If you can’t get a preapproval, ask the lender why you were denied. If it’s an issue you can remedy, like an error on your credit report that’s causing the lender to reject your application, you can address that right away and seek preapproval again when it’s resolved.
If your credit score is too low or other financial roadblocks prevent you from being preapproved, you can work to improve those areas, too. Raise your score by making payments on time and paying down (or paying off) your debt load, for example, or lower your debt ratio by finding a way to increase your income. Depending on your situation, this could take time, but it’ll go a long way.
Some lenders have very stringent qualifying criteria, so another option is to work with a different, more flexible lender. If you’re an account holder with a local bank or member of a credit union, these institutions might be more willing to work with you to get you preapproved.
FAQs about mortgage preapproval
Getting preapproved for a mortgage has an impact on your credit score. That’s because when lenders check your credit, they perform a hard inquiry, which can drop your score by a few points. The good news is that the effect is small and gets even smaller as time passes: Hard inquiries come off your report entirely after two years.
If you’re planning to get a preapproval from more than one lender, aim to do it within a 45-day window to avoid more damage to your score than necessary. Inquiries within this time frame will be counted as one inquiry instead of multiple ones.
A preapproval letter includes your name, the price of the home you gave when requesting the preapproval, the loan amount you’re preapproved for and the expiration date of the preapproval.
Some lenders also include conditions related to the preapproval in the letter, such as it only applies to a single-family home instead of multi-family property.
A preapproval is not a finalized offer; it’s one step on the path toward approval. One way to think of a preapproval versus an approval is the difference between a mechanic taking a quick look under the hood of your car and a mechanic doing a 100-point inspection.
To determine whether to fully approve and fund your loan, your lender will assess your application in the underwriting process, ensuring nothing about your financial situation has changed since you were preapproved. At this time, your lender will call your workplace to verify employment, evaluate the home you made an offer on and might ask for additional documentation, as well.
Even if you’re preapproved, it’s possible you could get denied the loan if anything doesn’t check out. Or you may not be approved for the original preapproval amount, if the appraisal determines the home is worth drastically less than the purchase price (lenders generally loan up to 80 percent of the home’s appraised value).
But, once you’re fully approved for a loan, you’re ready to move forward with the closing.