In a NutshellIf you’re shopping for a home, you should get a mortgage preapproval. A mortgage preapproval helps you understand how much you may be able to borrow to buy a home, makes you more attractive to sellers, and alerts you to problems that may affect your ability to get a loan. To get preapproved, you’ll need to provide your lender with documents they’ll use to verify your personal, employment and financial information.
What is a mortgage preapproval and how do you get one?
A mortgage preapproval is a letter from a lender saying that it’s tentatively willing to lend you a specific amount for a house.
Getting preapproved for a mortgage is a crucial first step in the home-purchase process. Sellers often want to see a preapproval letter before accepting your offer on their home.
Fortunately, the process of applying for preapproval is relatively quick and simple. Let’s explore what you need to do and how a mortgage preapproval can benefit you during the home-buying process.
- What is a mortgage preapproval?
- Factors affecting mortgage preapproval
- How to get preapproved for a mortgage
- Preapproval vs. approval
What is a mortgage preapproval?
Mortgage preapproval is a lender’s conditional approval for a home loan in the form of a preapproval letter. It lets home sellers know that you will likely be approved for a certain amount of financing, based on the information you provided in your preapproval application.
Keep in mind that preapproval is not a guarantee that you’ll be approved for the mortgage, and the terms you’re offered may change after you submit a complete, formal mortgage application.
How long does it take to get preapproved for a mortgage?
How long it takes to get preapproved can vary by lender. It could take as little as a few minutes to get a basic preapproval to 24 hours or 10 days or more. If you’re in a time crunch, make sure you find out how long the preapproval process takes with each of the lenders you’re considering.
What’s the difference between mortgage preapproval and mortgage prequalification?
The main difference is the level of scrutiny with which your information is examined. A prequalification is issued without verification of income, employment history, assets, etc. It assumes the information you gave is accurate. But a preapproval is issued only after the lender verifies the info you provide.
Is mortgage preapproval worth it?
Mortgage preapproval comes with several benefits. First, it gives you an idea of how much you can borrow, which will help narrow down your search to houses in your price range.
But remember that just because you’ve been preapproved for an amount doesn’t mean you have to borrow the maximum. In many cases, it’s probably a good idea that you don’t. That’s because many mortgage lenders use your gross monthly income (versus net monthly income) as a factor in determining how much you qualify for.
Your lender generally doesn’t consider your daily living expenses — things like groceries, utilities, childcare, healthcare or entertainment — or monthly debts in its calculations. It’s up to you to review your budget to make sure you’re comfortable with the loan amount. Don’t rely on your lender to tell you what you can afford.
The preapproval process could also uncover potential issues that would prevent you from getting a mortgage, so you can work them out before setting your heart on a house.
Lastly, a mortgage preapproval lets sellers know you have the borrowing power to back up an offer you make to buy their home, which could make your offer more competitive. It tells real estate agents, who typically work on commission, that spending time on you could well pay off with a transaction. And it alerts lenders that you’re a savvy borrower who may soon be taking out a mortgage loan.
In short, getting preapproved for a mortgage signals that you’re a serious buyer.
Factors affecting mortgage preapproval
Here are some of the biggest factors affecting your mortgage preapproval.
- Debt-to-income ratio — Your debt-to-income ratio is your total debt payments divided by your gross monthly income. If your DTI ratio is too high, it could indicate that you’re over-extended financially. Most lenders like to see a DTI of 43% or less.
- Down payment — The upfront money you put toward your mortgage (your down payment) affects how much you’ll pay for your loan. You’ll usually get better loan terms if you make a down payment between 10% and 20%. For conventional loans, making a down payment of at least 20% can help you avoid PMI payments as well.
- Credit — Your credit scores and history help a lender determine whether you qualify for a mortgage within its underwriting structure, as well as the mortgage rate you’ll receive.
- Income — Your lender will check your income to assess the likelihood that you’ll be able to afford the mortgage payment. In general, your lender likely wants to see that your housing costs don’t exceed 28% of your gross income.
- Employment history — Your lender will also look at your employment history. For instance, they want to see if you’ve had frequent gaps in employment, work on commission or recently started a new job.
How to get preapproved for a mortgage
Applying for preapproval for a mortgage is a straightforward process that requires some paperwork and, in many cases, just a few days for the lender to verify your personal and financial information.
Each lender’s process is different, but they’ll generally review your credit history, income, assets and debts before deciding to grant a preapproval and, if so, for what amount.
Gather the appropriate documents
Lenders will want to verify your identity, credit history, employment history, income and financial assets to issue a preapproval. They’ll likely ask you to fill out a uniform residential loan application (almost everyone calls it a 1003 or “ten-oh-three” — here’s an example uniform residential loan application from FannieMae).
The 1003 application asks for your personal information, financial information and loan information, including …
- Bank accounts, retirement and other accounts
- Any other assets you have
- Property you own
- Income and employment details
- Employer contact information
- Debts you owe or other liabilities
Your lender will also likely do a hard credit check, and may require additional home loan documents based on your individual situation, such as pay stubs, tax returns or bank statements.
Get quotes from different mortgage lenders
Just as you want to get the best deal on the house you buy, you also want to get the best deal on your home loan.
Every lender has different guidelines and interest rate options, which can have a big effect on your monthly payments. If you only get preapproved with one lender, you’re stuck with what it has to offer. When you get preapproved with multiple lenders, you can choose the offer that’s best for you.
Many lenders offer the ability to apply for preapproval, including Bank of America, Better Mortgage and Rocket Mortgage.
It’s important to do your homework before choosing potential lenders. You should research each lender and even the loan officer who would be handling your mortgage — there can be a big difference in knowledge and experience, depending on who processes your application.
After you choose some lenders, you’ll provide the information needed to complete the preapproval application process. An underwriter may examine your preapproval application to determine how much you can borrow. If an underwriter hasn’t reviewed your application, you haven’t been fully preapproved — so be sure to ask about the status of your application during the process.
Once the lender has all the documents it needs, it typically only takes a few days for the lender to let you know whether you’re preapproved and how much you’ve been approved for. But the preapproval process can take longer if you have a past foreclosure, bankruptcy, IRS lien or poor credit.
If you’re shopping for a mortgage, you have a window of time where multiple credit inquiries by lenders are counted as a single inquiry for your credit scores. The window is typically 14 days — though it could be longer.
Since it’s difficult to know which credit-scoring model a lender will use, you’ll likely want to get all those rate quotes within 14 days.
Don’t get preapproved too far in advance
When you receive your preapproval letter, it will probably say it’s good for 30 to 90 days. Since that’s a relatively short period, you’ll probably want to wait to get preapproval letters until you’re ready to start seriously shopping for a home.
And remember, a preapproval is only a conditional approval. If you rack up more debt, change jobs or reduce your savings, you could get denied when you go to get final mortgage approval.
Choose a lender
Once you make an offer on a house, it’s time to get official loan estimates from your list of potential lenders. After you apply for a mortgage, the lender must provide this estimate within three business days of receiving your application.
The document will include estimates for your interest rate, monthly payment, closing costs, taxes and insurance, as well as details on how the loan works, such as any penalty fees.
After you review and compare the estimates, you can choose the lender that best meets your needs and work with it to complete your application.
Preapproval vs. approval
Getting preapproved is the first step you can take when you’re ready to purchase a home. When you get preapproved, you’ll receive a letter from your lender stating the maximum amount you can borrow to purchase a home.
Getting preapproved is important because it helps you understand the price range you’re working with when shopping for a house. But it also shows the home seller that you’re a serious buyer and can obtain the financing you need.
A preapproval carries more weight than prequalification because the lender has verified your credit history and income. But it’s not a guaranteed loan offer — it’s an estimate that could change if your financial situation changes. Official loan approval, the final step in financing your home, happens when you’re cleared to close on your mortgage. Once you close on your house, you’re legally responsible for paying your mortgage each month.
Mortgage rates where you live
Mortgage or refinance rates depend on different factors, including where you live. To better understand what rates you may qualify for, including what the average mortgage or refinance rate is in your area, take a look at Credit Karma’s marketplaces for mortgage rates and mortgage refinance rates.
Getting preapproved for a mortgage provides many benefits to potential home buyers.
If you aren’t able to get preapproved, you can start working on whatever the issues are. That may mean paying down debt to improve your debt-to-income ratio, saving for a larger down payment or resolving inaccuracies on your credit reports.
Whatever the case, if you go through the preapproval process, you’ll be made aware of the issue and can address it before you begin your home search. If not, you could be in for an unpleasant surprise when you make an offer on a home.
Doing this work upfront can pay off — getting that mortgage preapproval letter in hand can help you stand out from the home-buying crowd.