How to get preapproved for a mortgage

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Getting a mortgage preapproval is a necessary step in the process of buying a home, giving a home seller assurance you’ve already been vetted for a loan.

What is a mortgage preapproval?

A mortgage preapproval 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 certain loan amount.

What should I get preapproved?

In today’s housing market, it will be almost impossible to get a seller to consider your offer unless you have a mortgage preapproval (or intend to pay all-cash). There are simply too many buyers for sellers to be willing to take a chance on one who hasn’t at least talked to a lender about getting a mortgage.

Another important reason to get preapproved: It gives you an idea of how much home you can afford based on how much money a lender is prepared to let you borrow. This can save you time during house hunting by eliminating properties out of your price range.

When to get a 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. 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.

If you’re following mortgage rates, you can sign up for a Bankrate account to determine the right time to strike on your mortgage with our daily rate trends.

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.

Mortgage preapproval process

1. Document submission

To get preapproved for a mortgage, you’ll need to supply documentation about your income, assets and debts. These documents typically include:

  • 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

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.

2. Credit check

In addition to providing documentation, you’ll also have to agree to a credit check. 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. Thanks to COVID protections instituted by the government, from now until April 20, 2022, you’re entitled to a free copy of your report from each of the major credit bureaus each week. These can be obtained at AnnualCreditReport.com. (Under usual circumstances, you’d only be allowed to access your reports for free once a year.)

During the credit check, the lender will look at your credit report and history to assess your credit utilization ratio, or the amount of credit you’re using relative to your total credit limit. The lower your credit utilization is, the better your chances of getting preapproved.

If you’re seeking a conventional mortgage, you’ll need a credit score of at least 620 to qualify. You might be able to get a mortgage preapproval with a lower score, however, and there are other loan programs, like FHA loans, that allow lower scores. The higher your score, however, the lower your interest rate.

3. Preapproval

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’re preapproved, you’ll be issued a preapproval letter stating this information.

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 debt in addition to your mortgage) accounting for no more than 36 percent of your gross monthly income.

What documents are needed for a mortgage preapproval?

  • Pay stubs from at least the past 30 days – Your current income is a major consideration in getting preapproved for a loan, so your lender wants to see that you have a reliable, predictable cash flow coming in.
  • Federal income tax returns from the last two years (including W-2s or 1099s) – These will help verify your employment history and show the lender a longer-term track record of your income.
  • Bank statements from at least the past two months (including checking, savings, money market and CDs) – Lenders like to make sure all your money is accounted for, so they want to check your bank statements to see that there aren’t any major unexplained deposits or withdrawals that could affect your loan.
  • Investment account statements (including retirement savings) – Returns on your investments can count as income, and lenders need to know about all your sources of money, not just your day job.
  • Documentation related to any gift funds you’re receiving – If a family member or friend is giving you money to help you buy a home, put together a document signed by them explaining the gift and the amount, and that the gift will not need to be repaid. (Pro tip: If you don’t already have these funds in your bank account, transfer them so they’re in hand as soon as possible.)
  • ID (such as a driver’s license or passport – Lenders need to make sure they know who they’re giving their money to, so they’ll want to 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 information from business accounts 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.

What does a preapproval letter include?

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 applying to a single-family home instead of multi-family property.

Does preapproval affect your credit score?

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.

Preapproval vs. prequalification

A mortgage prequalification is an indication of what you’ll likely qualify for based on basic information about your credit and finances, but it’s not the same as a preapproval. With a prequalification, your lender might only perform a soft credit inquiry, and often only relies on your own representation of your financial situation (in other words, what you tell them) rather than requiring documentation.

While a prequalification can be useful when shopping around and comparing potential loan terms, it’s not something a seller will consider if you were to make an offer.

On the other hand, getting a mortgage preapproval is a more rigorous process. You’ll provide documentation to back up your claims, and the lender will review your credit report in more depth. Unlike a prequalification, a preapproval is accepted as proof that you can afford the home you’re looking at and that the lender will fund your loan.

Preapproval vs. approval

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 for the loan if anything doesn’t check out. Once you’re fully approved for a loan, you’re ready to move forward with the closing.

What to do if you can’t get preapproved

If you can’t get a preapproval, try to find out from 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 a preapproval again when it’s resolved.

If you have too low of a credit score or other financial roadblocks preventing 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.

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