After years of saving up for a down payment and months of visiting different properties, imagine finding your dream home. It’s perfect for you, and you’ve already begun thinking of different ways to arrange your furniture. Then, you suddenly learn that the seller won’t even consider your bid because other buyers have something you don’t: a mortgage preapproval letter.
Luckily, you can get a preapproval letter too, as long as you meet lenders’ requirements. A mortgage preapproval letter is a useful tool that helps show the seller you’re serious about homebuying and able to obtain financing. Because the preapproval letter contains a specific amount that a lender is willing to let you borrow, it may also help you better understand what types of homes you can afford.
If you want to learn more about what mortgage preapproval means, here’s a rundown of what you should know:
- What Is Mortgage Preapproval?
- How Do I Get Preapproved For a Mortgage?
- Mortgage Preapproval FAQ
- The Bottom Line
What Is Mortgage Preapproval?
Mortgage preapproval is verification from a lender that they’re willing to offer you a home loan up to a certain amount. When you apply for mortgage preapproval, the lender will assess what you qualify for based on your income, assets, and credit. Once you’re preapproved, they’ll issue a letter indicating how much you can borrow on a tentative basis.
It’s important to know that mortgage preapproval doesn’t guarantee you’ll be granted final approval for a home loan. If your financial situation changes — for example, when you open a new line of credit — or if the property’s value is determined to be lower than the purchase price during the home appraisal, the lender may ultimately decide to reject your mortgage application.
How Do I Get Preapproved For a Mortgage?
Mortgage preapproval requirements can vary from lender to lender, but we’ve outlined the general process so you know what to expect. Here’s a step-by-step guide for how to get preapproval for a mortgage:
- Review your credit report. Lenders will look into your credit history, so it’s a good idea to check for any errors that might get in the way of preapproval. You can access your credit report for free once per year from each of the three credit bureaus: Equifax, Experian, and TransUnion.
- Pay down some of your existing debt. Chipping away at your debt can help you improve your credit score and become a stronger mortgage candidate. Of course, it’s easier said than done, so prioritizing higher-interest debt — like credit cards — is a strategic approach.
- Plan when you’ll get preapproved. Preapproval letters typically have an expiration date of 30 to 60 days after they’ve been issued, so you should make sure you’re prepared to begin house hunting soon after getting preapproved.
- Research different mortgage companies. Keep in mind that you don’t have to commit to the lender that issues your preapproval letter. In fact, you can even use it as a bargaining tool to shop around with other lenders and see if a better rate is available.
- Find out what the lender needs from you. Specifics may vary between lenders, so look up the exact paperwork required to apply for mortgage preapproval. Lenders will likely ask you for personal information that includes:
- Income verification documents, such as W-2s or 1099 forms
- Proof of assets, such as bank statements and investment account statements
- List of debts, such as credit card balances, student loans, and auto loans
- Additional records (depending on your situation), like proof of rent payments or a divorce decree
- Apply for preapproval. Once you’ve completed your application and included the necessary documentation, submit your request for preapproval. If you want, you can get preapproved for a mortgage online and avoid the hassle of an in-person visit.
- Receive your letter (and read it carefully). The preapproval letter will usually include your estimated monthly mortgage payment, maximum loan amount, and interest rate, as well as the letter’s expiration date.
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Mortgage Preapproval FAQ
If you’re still feeling foggy about the specifics of the mortgage preapproval process, that’s OK! Keep reading for the answers to some frequently asked questions below.
What is mortgage prequalification vs. preapproval?
While some lenders use the term “prequalification” and others use “preapproval,” both types of letters indicate how much the lender is conditionally willing to loan to you. The two terms serve a similar purpose, but there are legal differences.
With prequalification, the lender generally reviews basic financial information that you provide and estimates what you can afford. They won’t run a credit check or require official documents, but this means prequalification is less reliable in the eyes of real estate agents and sellers.
Preapproval, on the other hand, is typically more thorough and involves verifying your financial information. Any house offer backed by a preapproval letter carries weight because a lender will have pulled your credit and requested bank statements and other documents.
“Most lenders that I have worked with use these terms interchangeably,” says Marina Vaamonde, a real estate investor and founder of HouseCashin, a real estate investment company based in Houston. “I wouldn’t get hung up on the terminology. Until the lender issues you a final loan approval document which allows you to lock in your rate, they can still ‘unqualify’ or ‘unapprove’ you.”
Does getting preapproved hurt your credit?
Getting preapproved requires lenders to check your credit, which can lower your credit score.
Credit checks are categorized as either a soft inquiry or a hard inquiry. When a lender checks your credit, it’s considered a hard inquiry that can hurt your score. Luckily, there’s a two-week window where multiple hard inquiries are only counted once, so you can keep the damage to a minimum by having different lenders pull your credit report at the same time. It’s another reason to hold off on getting preapproved until you’re ready to buy a home.
Vaamonde says she typically pulls her own credit scores from all three credit bureaus and provides it to the loan officer.
“I then request that they not pull my credit until I’m 100% certain that I will be using them for the loan,” she says. “This process has allowed me to prevent a number of lenders from unnecessarily pulling my credit.”
How much will I get preapproved for?
Different financial institutions will give you varying offers depending on what they make of your credit score, the size of your down payment, and other factors. However, in the same way that a preapproval letter isn’t a guaranteed loan offer, the figures included in the letter aren’t final. It’s a good idea to compare quotes from different lenders and shop around for the best rate and terms for your situation before making a final decision.
How long does a mortgage preapproval last?
Mortgage preapproval letters typically expire after 30 to 60 days, but the exact time frame will depend on your lender. In any case, you don’t want to request your preapproval letter too early and run the risk of it expiring before you’re ready to make an offer on a home.
When should I get preapproved for a mortgage?
Because your mortgage preapproval letter will expire after a month or two, it’s a good idea to get preapproved when you’re serious about viewing properties. Keep in mind that many real estate agents may not be willing to show you homes unless they’ve gotten a handle on your budget via a preapproval letter. Similarly, many sellers may refuse to consider your offer until they’ve seen proof that you can get financing.
Before all that, however, you should evaluate your situation to see if you’re truly ready to plant roots and you can make the purchase without overly straining your finances.
Do I need to get preapproval for a mortgage?
Though you aren’t legally required to get preapproved, sellers will often want to see a mortgage preapproval letter before considering your offer. Otherwise, they risk wasting their time with prospective buyers who can’t actually afford the home. Having a preapproval letter makes you more competitive as a buyer by increasing your credibility.
FAQ, Continued: Answers to 10 Common Questions About Mortgages
The Bottom Line
Getting preapproved is a very helpful step in the homebuying process, especially if you time your application just right. A mortgage preapproval letter shows real estate agents and sellers that you’re a qualified buyer — bringing you a couple of steps closer to making an offer on your dream home.