Key takeaways
- A mortgage preapproval is a statement of how much money a lender is willing to let you borrow to pay for a home.
- Getting preapproved means it’s unlikely you’ll fail to get financing, and it may also help you pay less in mortgage interest rates.
- There are several important steps in the preapproval process, such as shopping around for lenders and gathering financial documents.
For most buyers, getting preapproved for a mortgage is vital as it gives you a solid idea of how much you can borrow. It also shows sellers that you’re serious about buying a home.
What is 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 specific loan amount.
Preapproval vs. prequalification
Preapproval and prequalification are similar terms but different in crucial ways.
- Prequalification: 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.
- Preapproval: Preapprovals require more underwriting and better indicate 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.
Preapproval vs. final approval
Like how prequalification and preapproval are different, preapproval differs from final approval too.
- Preapproval: Preapproval doesn’t guarantee you a loan; it’s just one step toward approval. The lender gives your finances a brief overview.
- Final approval: The lender completely authorizes your application. They thoroughly review your finances and home purchase, including verifying employment and scheduling the appraisal. If something unexpected comes back during their search, you might not qualify for a loan or find the details of your loan have changed.
How to get preapproved for a home loan
In many cases, you can get preapproved for a mortgage by submitting an online application and speaking to a lender over the phone, if necessary. If you prefer to do things in person, you can usually meet with a lender at a local bank branch. However you plan to get preapproved, follow these steps:
1. Choose a mortgage lender
To get the best rates and fees, it’s important to shop around before you select a lender for your mortgage preapproval.
Investigate different options to determine who has the lowest rates and fees — and apply in more than one place to compare mortgage offers. 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
You’ll need to supply documentation for a mortgage preapproval, which includes information 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
- Gift letters from anyone giving you money 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.
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 needs to make sure you have a high enough credit score to buy a home.
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.
Under federal law, you’re entitled to a free copy of your credit report from each credit bureau once per week. These can be obtained at AnnualCreditReport.com.
If you are seeking a conventional mortgage, you’ll need a minimum credit score of 620. For a federally insured FHA loan, you’ll need a minimum score of 580 with a down payment of 3.5 percent. Other loan types, such as VA loans and USDA loans, do not have government-mandated minimum credit scores, however, lenders often set their own minimum scores. Generally, the higher your credit score, the lower interest rate and better mortgage terms a lender will offer you.
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.
As previously mentioned, the lender will also conduct a hard pull on your credit. 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 for a mortgage.
The hard inquiry will drop your credit score by a few points, but the impact decreases over time until it falls off your credit report after two years. The upside is multiple hard pulls for mortgage preapproval can be grouped into one on your credit history. If you want to compare offers, try to get preapproved by multiple lenders within a 45-day period to limit the impact on your credit score.
Once the lender assesses your credit and financial profile, it’ll decide whether you’re preapproved for a mortgage. If you are, you’ll be issued a preapproval letter stating the loan amount and maximum home purchase price you were approved for, along with the preapproval expiration date. You’ll also see the loan type and term in this letter.
Benefits of a getting preapproved for a home loan
No matter if it’s a buyer’s market or a seller’s market, getting preapproved is essential for buying a home. Here’s what a preapproval does:
- Credibility with sellers: Your preapproval shows sellers you’re a serious buyer who is likely to qualify for financing. It also makes your offer more compelling.
- Focused house search: With a preapproval, you can limit your home search to properties that fit within your budget. Doing so helps you save time and avoid the disappointment that comes with falling in love with a home that’s out of reach.
- Rate shopping: Getting preapproved with multiple lenders makes it easier to compare mortgage offers. Plus, it gives you an opportunity to find a lower mortgage rate that could save you thousands over the loan’s term.
Mortgage preapproval timeline
If you start the mortgage preapproval process early, stay organized and keep abreast of your application, your preapproval is likely to go faster. And the sooner you get it, the sooner you can begin serious house-hunting.
How far in advance should you get preapproved for a mortgage?
The best time to get a mortgage preapproval is before you start looking for a home. If you don’t and 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 on the home.
Many sellers want to see a mortgage preapproval letter as part of your home offer, 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 homebuying 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.
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, so 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 are denied for mortgage preapproval
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 credit 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.
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 a member of a credit union, these institutions might be more willing to work with you to get you preapproved.
Mortgage preapproval FAQ
Mortgage preapproval is free with many lenders. However, some lenders charge an application fee which you may have to pay upfront regardless of whether you’re approved.
Yes, you can get preapproved for a mortgage as a first-time homebuyer, and it’s a good idea to do so before you start seriously looking for a home. The same guidelines often apply for first-time homebuyers as they do for repeat homebuyers. However, you may have access to first-time homebuyer assistance loans and programs.
When you apply for preapproval, the mortgage lender will perform a hard credit pull to check your credit history. This will temporarily lower your credit score by a few points. However, if you’re shopping around by applying with multiple lenders, you have a 45-day window in which the multiple credit inquiries will only be counted as one on your credit report.
