Mortgage preapproval: What you should know

A young man and woman sit in the cab of their moving truckImage: A young man and woman sit in the cab of their moving truck

In a Nutshell

If you’re shopping for a home, you should get a mortgage preapproval. A mortgage preapproval helps you understand how much house you can afford, 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.
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A mortgage preapproval is a letter from a lender saying that it’s tentatively willing to lend you a certain amount for a house.

Getting preapproved for a mortgage is a crucial first step in the home-buying process. It gives you an idea of how much you can borrow, which will help narrow down your search to houses in your price range. 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.

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 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 serious about buying a home.

Fortunately, getting preapproved is relatively quick and simple. Let’s explore what you need to do for a mortgage preapproval and how it can benefit you during the home-buying process.



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).

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 inquiry, and may require additional documents based on your individual situation, such as pay stubs, tax returns or bank statements.

Research mortgage lenders

It’s important to do your homework before choosing a lender. You should research the 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 a lender, you’ll provide the information needed to complete the preapproval process. An underwriter may examine it 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.

FAST FACTS

What’s the difference between a preapproval and a prequalification?

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 provided by the borrower is accurate. But a preapproval is issued only after the lender verifies the info you provide.

Consider working with multiple 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.

Your lender will pull your credit reports during the preapproval process. This is known as a hard inquiry and will usually lower your credit scores by a few points.

If you’re shopping for a mortgage, you have a window of time where multiple inquiries 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.

Shop for homes during the preapproval period

When you receive your preapproval letter, it’ll 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.

3 picks for mortgage lenders that offer preapproval

If you’re thinking about buying a home in the near future, here are our picks for some mortgage lenders to consider that offer preapproval.

1. Rocket Mortgage by Quicken Loans

This online lender gives you two options for preapproval: a “Prequalified Approval” and a “Verified Approval.” The prequalified approval lets you apply online and sync your bank account to verify income and assets for your down payment and closing costs. The verified approval is billed as “even stronger” and connects you with a lending specialist who performs a full analysis of your assets, income and credit. That option includes a guarantee that Rocket will pay you $1,000 if you don’t close on your financing based on its review. For more details, read our Rocket Mortgage review.

2. Wells Fargo

This big bank offers mortgage preapprovals — though you’ll have to call or fill out an online form to talk to a Wells Fargo mortgage specialist to get started. Wells Fargo is attractive since it has a national reach and has conventional loans you may qualify for with as little as a 3% down payment. It also offers FHA and VA home loans. Check out our Wells Fargo mortgage review for more details.

3. Better Mortgage

Better Mortgage stands out because it gives you the ability to download a “Verified Mortgage Pre-approval Letter” if you qualify. The online lender says it’s a completely digital experience. Read our Better Mortgage review to learn more.


Next steps

Getting preapproved for a mortgage provides many benefits to potential home buyers. It’s 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.

Plus, going through the preapproval process could help alert you to potential problems that may prevent you from getting a mortgage. Each lender’s process is different, but they’ll generally review your credit history, income, assets and debts before granting a preapproval.

If you don’t get approved, 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 it is, if you go through the preapproval process, you can take care of the issue before you begin your home search. If not, you could be in for an unpleasant surprise when you make an offer.

Remember, though, 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 (not 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 — in its calculations.

It’s up to you to review your budget to make sure the loan amount is one you’re comfortable with. Don’t rely on your lender to tell you what you can afford.

Once that’s done, you may end up with a preapproval letter that’ll help you stand out from the home-buying crowd.


About the author: Jennifer Brozic is a freelance financial services writer with a bachelor’s degree in journalism from the University of Maryland and a master’s degree in communication management from Tow… Read more.