Key Takeaways:
- A mortgage preapproval indicates eligibility for a specific loan amount but does not equate to securing the actual mortgage loan.
- Preapproval is an essential step in the home buying process. It gives buyers a clear understanding of their borrowing capacity based on their financial situation.
- The misconception that preapproval is the same as prequalification can lead to confusion. They are distinct processes with different implications for home financing.
Are you eager to become a homeowner? Having a mortgage preapproval letter can be helpful during your quest to find and purchase a home. While not a binding commitment, a preapproval for a mortgage illustrates that you have obtained conditional approval from a lender.
Strong credit scores may help you obtain better loan terms and lower interest rates, so it’s advantageous to be in good financial standing before seeking preapproval from a lender.
Preapproval is only valid for a limited period, typically 60 to 90 days, so it’s best to submit the required documentation promptly to maximize your time to search for a home.
Obtaining a preapproval for a mortgage can help you better understand your purchasing power and show sellers that you’re a serious buyer. Let’s explore the many ways mortgage preapproval can simplify the home buying process.
What Is Mortgage Preapproval?
Mortgage preapproval is a conditional agreement from a mortgage lender that they are willing to lend you a specific amount of money.
A mortgage preapproval isn’t a guaranteed loan offer. However, a mortgage preapproval letter signals to sellers that you’re serious about buying, have your finances in order, and are likely to qualify for financing.
During the preapproval process, a lender thoroughly reviews your finances. Lenders consider factors like credit scores, debt to income ratios, and other information found in credit reports to determine whether to preapprove hopeful home buyers.
You’ll be asked to submit documents related to your income, assets, and credit history. Lenders run credit checks to verify this necessary financial information against your submitted documents. Some examples of documents that you may be required to submit include:
- Recent pay stubs
- Tax documents
- Bank statements
- List of assets
- List of outstanding debts
- Business records (if self-employed)
The mortgage lender will review your documents and your credit report and credit score and then decide whether they feel comfortable offering you a mortgage. This information also helps the lender determine the maximum amount of money they’d be willing to lend.
Are you wondering how long a mortgage preapproval is valid? Once you have been preapproved for a mortgage, you’ll typically have 30 to 90 days before your approval expires. Getting preapproved for a mortgage isn’t a requirement, but it’s recommended because it can give you an edge when making offers in a competitive market.
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Mortgage Preapproval vs. Mortgage Prequalification
Prequalification and preapproval aren’t interchangeable words. Mortgage preapproval and prequalification differ in meaning, and the process for obtaining each also differs.
A preapproval can help you establish credibility by showing sellers that a lender has thoroughly assessed your financial situation. During the preapproval process, the lender determines whether they feel confident offering you a mortgage and the maximum amount they would consider letting you borrow if you decide to officially apply for a mortgage.
Meanwhile, mortgage prequalification can help you estimate how much of a home you can afford and help you gauge whether you might qualify for a mortgage.
Your lender uses the information you provide, such as your income, debt, and credit history, to estimate how much you might be able to borrow and whether you have a chance of qualifying for a mortgage. However, your financial information isn’t verified.
Neither preapproval nor prequalification mean you’re approved for a home loan. Prequalification can help you estimate a home buying budget, but it’s less reliable than mortgage preapproval.
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Benefits Of Mortgage Preapproval
Are you ready to start looking for a home? Mortgage preapproval can provide many advantages. Here are some of the most notable benefits that you may experience with a mortgage preapproval:
Establishes How Much House You Can Afford
A common reason to get a mortgage preapproval is to establish a realistic home buying budget.
A mortgage preapproval can help you understand how much house you can afford and how much you’re likely able to borrow. Your lender will establish a maximum loan amount you qualify for based on various factors, such as your credit history, income, and employment status.
Your emotions may take over as you begin to look at homes. You may feel tempted to consider homes outside your budget, which could lead to future financial woes. But with a mortgage preapproval, it may be easier to keep your budget in mind as consider which homes to tour.
A mortgage preapproval can help you budget for all homeownership costs. Once you know how much your monthly mortgage payments might cost, you can more easily factor in other expenses, like home improvements or anticipated purchases for your new home.
Buying a home is a big financial decision, so it’s important to feel confident that you can afford a home before putting an offer in. As you look at homes, a mortgage calculator can help you estimate monthly mortgage costs.
Shows Sellers You’re A Serious Buyer
Many other hopeful buyers will likely be viewing properties you’re interested in. Obtaining a preapproval for a mortgage will show sellers that you’re a serious buyer. It may also help make your offer to buy a house more appealing if the buyer has to decide between multiple offers.
Many sellers feel more confident dealing with preapproved buyers because of a perceived lower risk of a deal falling through at the last minute due to financing problems.
Knowing a lender has assessed your financial standing can make you a more attractive buyer to sellers. Some may be more willing to negotiate the terms of your offer, such as the down payment amount or total purchase price.
Streamlines The House Hunting Process
Having a preapproval can simplify the entire home buying process. It can help you have more confidence when making decisions as you view properties because you’ll clearly understand your financial capabilities, so you can make choices that align with your financial situation.
Knowing your budget is an important house-hunting etiquette rule to follow when scheduling home viewings. It can help you maintain realistic expectations as you determine potential properties to visit, which can minimize time wasted touring homes that are out of budget.
Finally, a preapproval for a mortgage gives you the knowledge required to lead with your best offer once you know when you’ve found the right house.
Makes The Closing Process Faster
Getting preapproved for a mortgage may also help to speed up the closing process. A speedy closing can allow you to get settled into your new home faster. Since your lender will have already reviewed your finances, they will have the information needed to process your loan application faster once you’re ready to apply for a mortgage.
If you’re hoping to close on your home as quickly as possible and want to avoid delays, it’s a good idea to obtain mortgage preapproval.
Preapproval Can Provide An Interest Rate Estimate
Many lenders list the loan type and estimated interest rate that you might qualify for in their preapproval letters. While a preapproval doesn’t guarantee or lock in a specific interest rate for your mortgage, it can help provide an estimate for budgeting purposes.
Some factors that will influence the interest rate you qualify for include:
- Home loan type
- Length of loan
- Your credit score
- Your debt to income ratio
- Other financial information on your credit report
Mortgage rates fluctuate, so the interest rate displayed on your preapproval letter may change. Are you hoping to get the best mortgage rate?
While not typically offered at preapproval, your lender may offer a rate lock after you officially apply for a home loan and your mortgage application is approved.
A rate lock can help you avoid potential rate hikes prior to closing. Mortgage rate locks are typically valid for 30 to 60 days. Some lenders offer rate locks for free, while others charge a fee.
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A Mortgage Preapproval Isn’t A Guarantee
Are you still deciding whether to get mortgage approval before finding a house to buy? Remember, a mortgage preapproval doesn’t guarantee a final loan commitment. A preapproval is a conditional offer based on an initial financial assessment.
Once an offer is approved, your financial approval is contingent upon many other factors, including a stable financial status, a satisfactory home appraisal, and meeting the specific conditions outlined in the loan requirements.
Let’s review answers to some frequently asked questions about mortgage preapproval:
The Bottom Line
A mortgage preapproval can be a powerful tool for home buyers. Securing preapproval from your mortgage lender can provide a better understanding of how much home you can afford and help you easily navigate the real estate market.
Ready to seek preapproval for a mortgage? Ensure your financial affairs are in order and gather the necessary documentation to avoid delays. If you have questions about the preapproval process, including what documentation you need to provide, contact your lender for guidance.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
