How To Get Preapproved For A Mortgage

When you’re looking for a house, it helps to have an idea of how much you can afford to spend on your new home. With an intense housing market, having a clear sense of your home buying budget can make it easier to navigate the space and identify which home buying opportunities will fit with your finances. One way to find out how much lenders may be willing to give you for your mortgage loan is to get preapproval for a mortgage before you start making offers.

Here’s a closer look at what preapproval is and how to best prepare to get preapproved by a lender.

What Is Preapproval For A Mortgage?

With a mortgage preapproval, the lender examines your finances and credit history to determine how much house you can afford. They’ll use this information to decide how large of a loan they’re willing to give you and what interest rates you may qualify for. It’s effectively due diligence that you’ll qualify for a set loan amount and interest rate before you purchase a home assuming your finances remain stable. Once you’re done with the preapproval process, your lender will send you a preapproval letter. This letter is a document from a mortgage lender telling you how much you can afford based on your credit report, income and assets. You can use the letter to make your home offers stand out since it shows sellers that you’re already qualified for a mortgage.

Your preapproval is one of the first steps in your relationship with your lender. If you get preapproved before finding a home, you won’t have to start the whole mortgage application process once you’ve signed the purchase agreement. And many sellers and real estate agents won’t work with a buyer who’s not preapproved.

What Happens During The Preapproval Process?

At its most basic, a mortgage preapproval is a formal analysis of your financial situation. Your mortgage lender will require information on your finances and use it to calculate your preapproval.

If you’re seeking preapproval from a lender, you can expect to complete the following two steps.

1. Collection Of Financial Documents

To get preapproved, you’ll need to provide your lender with financial documents for them to review as part of your application. These include, but are not limited to:

• Proof of income
• Proof of employment
• W-2s
• Bank statements
• Social Security number
• A current driver’s license

Other documents may be required, too. For instance, if a family member gives you money for your down payment,  you will need to provide a gift letter accounting for the funds. Your lender will then review these documents and use the information to determine how big of a loan they’re willing to lend to you.

2. Credit Check

Your lender will also perform a credit check and review your credit score in detail. By checking your credit, your lender will be able to get an idea of how much debt you currently have, whether you’re current on payments and the types of debt you’ve had in the past. Your credit report also tells your lender how you’ve handled paying debts in the past. If you’ve made payments on time and have paid off many of your debts, your lender will likely see you as a relatively safe borrower. However, if you’ve struggled to make minimum payments or defaulted on loans in the past, they may be less willing to lend you money.

After completing these steps, your lender will determine how much money they’re willing to give you and the interest rate they’ll assess on the loan. This gives you an accurate idea of how much home you can afford before you even make an offer on a property. That amount will be documented in your preapproval letter, which you will then be able to present to the seller of a home you’re interested in purchasing as a means of demonstrating your readiness and qualifications as a home buyer.

Mortgage Prequalification Vs. Preapproval

It’s important to note that preapproval differs from prequalification. Understanding the difference can help you throughout the home buying process.

Mortgage Prequalification

When you get prequalified, your lender doesn’t pull your credit or verify any of your financial information. Instead, they use the information you provide combined with a soft credit check (one that doesn’t count against your credit score) or none at all to give you an estimate about how much you’ll likely qualify for in a mortgage. That amount is just an estimate and may be higher or lower depending on what the lender uncovers when doing a more thorough dive into your financial history.

While you may be able to use a mortgage prequalification to make an offer on a house, it’s not always a good idea. If you make an offer on a house but don’t get approved for that full amount, you’ll miss out on the home.

The best way to utilize a prequalification is to help you explore your mortgage options and choose the right loan type for your needs.

Mortgage Preapproval

Mortgage preapprovals go much further than prequalifications. They give you a firm idea of how much home you can afford and allow you to lock in your interest rate while you shop for a home. This gives you peace of mind and can help you better figure out your home buying budget before you start looking at properties.

How To Use Your Home Loan Preapproval

Once you have your preapproval letter in hand, you can shop for a house with confidence knowing that you can make a rock-solid offer.

Keep in mind, however, that preapprovals do have a time limit. At a certain point, the lender has to recheck your credit report and reverify your income and assets. This time limit varies from lender to lender, but preapprovals are typically valid for 90 days.

If you’re already working with a lender, it’s important to make your preapproval work for you. Let’s say you want to make an offer on a house for $150,000, but you’re preapproved for $200,000. One of the things you can do is adjust the amount of your preapproval letter to be lower so it doesn’t look like you’re lowballing the seller by offering less than you can afford.

Preapproval FAQs

What are the steps to getting a preapproval?

As discussed above, the biggest steps of the preapproval process are when your lender:

•  Reviews your documents on income and assets
•  Performs a credit check
•  Writes a preapproval letter stating how much you can afford

From there, your preapproval will typically be good for a few months. If you don’t purchase a home within that time, you’ll need to repeat these steps to renew your preapproval.

Why is getting preapproved for a home loan important?

Presenting a home seller with a mortgage preapproval letter shows them that your lender has assessed your finances and determined you can afford to purchase their home. A preapproval letter can help your offer stand out and provide the seller with more peace of mind knowing they’re selling to a buyer whose finances have been verified and is less likely to have their financing fall through at the last minute.

Does it hurt your credit score to get preapproved for a mortgage?

If your lender performs a hard inquiry to access your credit report through one of the three main credit bureaus – Equifax^®, TransUnion^® or Experian™ – your credit score may temporarily drop by a few points. Rest assured, though, that this reduction won’t cause significant or long-term damage to your credit.

Can you buy a house for less than your preapproval?

Yes! While your lender may approve you for a large mortgage, you aren’t required to buy a house that’s worth that exact number. Your preapproval amount is the maximum loan amount that the lender is willing to give you. By borrowing less, you’ll end up saving money over the life of the loan.

Does getting preapproved mean I’m guaranteed approval with the lender?

Preapproval does not mean your lender is required or guaranteed to approve you for the final loan. If your finances change dramatically from the time of your preapproval to when your lender starts the underwriting process or the home doesn’t appraise well, they may not issue you the loan.

What should I do if I can’t get preapproved?

It’s possible that your lender might deny you for preapproval or for the amount you want. Your credit score might be too low, your debt-to-income ratio (DTI) might be too high or the lender might decide your income isn’t adequate for the size of mortgage you want.

If you end up getting denied, talk to your lender about what specific steps you need to take in order to increase your chances of preapproval, and begin planning ways to improve your financial situation.

The Bottom Line

Mortgage approval is essential when buying a house. Receiving a preapproval letter from your lender can give you a clearer sense of how much house you can afford, helping you navigate the housing market with confidence.

As you talk with your lender about getting preapproved, make sure you have all of the necessary documentation gathered and that you’re able to present your finances in the best light possible.

Ready to get started on your home buying journey? Apply online and start the mortgage approval process today or give us a call at (888) 452-0335.