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How to Get Preapproved for a Mortgage, and Why It’s So Important

The housing market is changing, but here's some advice: Get preapproved for a mortgage before you start house hunting.

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Buying a home is a complicated process, but the first step is relatively straightforward: You need to get preapproved by a mortgage lender.

The current housing market makes preapproval even more essential. Mortgage rates are high, and so are home prices. The preapproval process can help steer you toward certain neighborhoods or homes that fit your budget. It will also show mortgage lenders that you’re a serious buyer. Read on to learn more about mortgage preapprovals and why they’re so important on the pathway to homeownership.

What does it mean to be preapproved for a mortgage? 

Being preapproved means that a mortgage lender has conducted a preliminary review of your finances and that you’ll most likely get approved for a mortgage. The key thing to emphasize here is “most likely,” as you can still get denied for a mortgage after being preapproved. 

However, the preapproval process means that a lender took an initial look at your pay stubs, credit score, income tax returns, monthly debts, bank account balances and overall monetary well-being, and they liked what they saw. 

When you get preapproved, the lender issues a written statement that includes some key components, including the interest rate, the maximum loan amount and your expected down payment. You’ll be able to show this letter to a seller to demonstrate how serious you are as a buyer. If this is your first time buying a home, it’s important to understand just how important the mortgage preapproval process is for your chances of success.

“Get preapproved so you know what you can afford,” says Megan Rork, Chicago-based real estate broker at Coldwell Banker Realty. Rork notes that one of the biggest pitfalls for buyers is dragging their feet and not doing the important legwork. “Some of them assume they can just call up a realtor and say, ‘let’s start shopping.’ It doesn’t work that way, though.”

Preapproval vs. prequalification: What’s the difference?

When you start looking for a mortgage, another term you might come across is “prequalification.” Though home loan preapproval and prequalification have some similarities, they are different. 

Being preapproved generally carries more weight than being prequalified. Most mortgage lenders conduct a soft credit check with a prequalification, which doesn’t impact your credit report. A preapproval, on the other hand, involves a hard credit pull. That can ding your credit score by a few points in the short term, but it’s worth it in the long run. It means a lender has done a more rigorous search of your credit history, gross monthly income and overall finances, and the results look good.

When should you get preapproved for a mortgage?

Because a mortgage preapproval letter doesn’t last forever, timing is everything. A preapproval for mortgage loans is typically valid for a certain time period, usually 30 to 60 days, according to the Consumer Financial Protection Bureau. With that in mind, it’s wise to submit a request close to when you’re going to start checking out open houses and scheduling showings. 

You only really need one preapproval to demonstrate that you’re serious, but having multiple lenders issue preapprovals can potentially strengthen your hand. Plus, multiple quotes can help you find the best deal for your final loan approval. No lender is the same, and you may be able to negotiate a lower rate or fewer fees from certain lenders. And if you get multiple credit inquiries for the same type within a short period of time, the credit bureaus usually treat those as one inquiry and don’t knock down your credit score.

How to get preapproved for a mortgage 

The mortgage preapproval process is fairly straightforward. Here’s a rundown of what to expect:

Step 1: Review your financial situation

Before a lender looks at your finances, get everything in order. Pull your credit report and review your credit history to make sure everything is accurate. If you spot an error, reach out to lenders and credit bureaus to make the necessary corrections. This isn’t a quick process, so be sure to get this started as early as possible.  

Also, try to reduce your debt-to-income ratio: the lower, the better. Your DTI, which represents all your monthly debt payments divided by your monthly income, is a way for lenders to measure if you’ll be able to cover your monthly mortgage payments. Most lenders will not approve an application for someone with a DTI above 43%. For example, if you have a monthly income of $7,000, a lender would want to see your total monthly debt -- including your car loans, student loans, minimum credit card payments and your mortgage -- be less than $3,010. If you have a high DTI, focus on tackling your credit card debt first. 

Step 2: Submit your financial documents

For an official preapproval, lenders want proof of your income and liabilities. Not all lenders will require the same information for preapproval, but you’ll need to provide it at some point before your home loan becomes official. Having all of it prepared may speed up the process. 

  • Your employment history (and contacts for verification)
  • Pay stubs from the last 30 days
  • Bank statements from the last two months
  • W-2s and possibly tax returns from the last two years
  • Insurance agent contact information and declarations
  • Outstanding debt information (your lender can usually just pull this from credit reports)
  • Business financial statements and tax returns (if you’re self-employed)
  • Expected down payment amount (this affects your loan terms, interest rate and potential private mortgage insurance)

If you’re self-employed, be ready to hand over more documentation such as profit and loss statements and business licenses.

Step 3: Lender review

Next, your lender will review your documents, examine your credit history and verify your information. This may include calling current and previous employers to confirm your employment, wages, and outstanding loan amounts, and investigating unusual transactions on your bank statements. Normally, the mortgage preapproval process should take no more than a few days, and much faster if you go through an online mortgage lender. If your financial details are simple, online lenders can issue preapprovals via an automated system in as little as 15 minutes.

Step 4: Get your home loan preapproval (or rejection) letter

Once your lender has completed the review, you’ll receive the verdict. If there are no serious issues, you’ll get a preapproval letter indicating your maximum home loan amount, estimated interest rate, loan type and terms. Give this letter to your real estate agent so they’ll have it ready to submit with any offer.

What to do if you’re declined for a preapproval

There’s always a chance you won’t get mortgage preapproval on the first round. But don’t be disheartened -- one rejection doesn’t mean you can never get a mortgage. It could be that other mortgage lenders offer more relaxed standards. There are quite a few home loan types, too. For example, while you might be declined for a conventional loan, Federal Housing Administration, or FHA, loans come with less stringent standards.

If you apply with multiple lenders and still can’t get preapproved, your mortgage lender has to tell you why your application was denied based on the Equal Credit Opportunity Act. It may have been your credit score, or that you haven’t been at your current job long enough. Whatever the reason is, now you know what to work on so you can get preapproved in the future.

What to avoid when seeking mortgage preapproval

There are always ways for things to go sideways. Here are a few things to avoid during the mortgage preapproval process: 

Don’t apply when you’re not really ready: If you already know your credit score isn’t great or you have too much debt, don’t waste time applying for preapproval (and hurting your credit even more in the process). Make a plan to rebuild your credit to enhance your chances in six to 12 months.

Don’t assume your terms are final: Getting preapproved for a mortgage is not the same as officially having final loan approval. Your terms can change. For instance, unless your interest rate is locked for 30 or 60 days, your final rate may vary, albeit slightly. If any information you provided wasn’t accurate, that could change your final terms, too.

Don’t take on new debt between preapproval and underwriting: Your financial situation can change your loan terms or derail the loan altogether. Once you’re preapproved, hold off on any big financial changes. That means no changing jobs, no new credit cards and no major purchases.

Don’t wait too long after preapproval: Your loan preapproval is usually only good for 30 to 60 days. Once you have a letter, it’s time to start house hunting and getting ready to make an offer. Otherwise, you may have to restart the mortgage preapproval process.

FAQs

A mortgage preapproval can help you understand how much you can afford for a monthly payment, and it will show any seller that you’re a qualified buyer and serious about getting approved for a mortgage.

A preapproval is typically good for 30 to 60 days. That puts a bit of rush on your work as a buyer. Make sure you get a mortgage preapproval when you’re really ready to start hunting for a home. 

It doesn’t hurt to get preapproved by multiple lenders. In fact, it’s wise to get estimates for mortgage loans from a few different lenders to help compare offers and find the best mix of competitive rates and low fees.

Yes. A preapproval for a mortgage loan is by no means a guarantee that you will receive official approval to borrow the money to buy a home. A lender can still deny your formal mortgage application. The best way to make sure you don’t get denied is to limit any changes to your finances between your preapproval and your closing. That means no switching jobs, no new loans – nothing big to rock the boat of your personal finances.

Send a copy of your preapproval letter to your real estate agents. When you’re ready to submit an offer to a seller, your agents will include your preapproval documentation. 

Luke Daugherty is a freelance writer, editor and former operations manager. His work covers operations, marketing, sustainable business and personal finance, as well as many of his personal passions, including coffee, music and social issues.
David McMillin writes about credit cards, mortgages, banking, taxes and travel. Based in Chicago, he writes with one objective in mind: Help readers figure out how to save more and stress less. He is also a musician, which means he has spent a lot of time worrying about money. He applies the lessons he's learned from that financial balancing act to offer practical advice for personal spending decisions.
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