Mortgage preapproval: Why it’s a good idea and how to do it

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In a Nutshell

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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Getting preapproved for a mortgage is a crucial step in the home-buying process.

And it should be among the very first you take, because a preapproval gives you an idea of how much you can borrow. It lets sellers know you have the borrowing power to back up an offer you make to buy their home. 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.

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.


Why get preapproved for a mortgage

When you decide to buy a home, it can be tempting to pull up listings on your computer and schedule appointments to see your favorite houses. But if you don’t already have a preapproval letter in your pocket, that can be a mistake. Taking the time to get preapproved can give you an advantage over potential buyers who aren’t preapproved. Here’s how.

You’ll get a better idea of how much you can borrow

Getting preapproved can help you set realistic expectations about what you can afford.

When you’re house hunting, it’s easy to get caught up in the excitement of the search and look at homes that are outside your budget. Getting preapproved can help you set realistic expectations about what you can afford. You’ll have a conditional green light from the lender for a specific loan amount, so you can focus on homes in that price range.

That doesn’t mean you have to borrow the maximum, though — and 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 their 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 completely to tell you what you can afford.

Your offer might be more competitive

If you have a preapproval letter, it lets sellers know a lender has reviewed your current financial situation and conditionally determined you can afford to buy a house. This gives sellers confidence that the process is unlikely to get derailed because you can’t secure financing.

“A seller is going to take the most bulletproof offer they can get,” says Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate.

You’ll be alerted to potential problems

Each lender’s process is different, but they will generally review your credit history, income, assets and debts before granting a preapproval. What they uncover can alert you to potential problems that may prevent you from obtaining a mortgage.

“Out of every 10 people I talk to, six have work they need to do before they’re ready to get a loan,” says Beeston.

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.

How to get a mortgage preapproval

Now that you have an idea of why it’s important to get preapproved, here’s what you need to do to make it happen.

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 employable 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.

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 process.

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.

Once the lender has all the documents they need, it typically only takes a few days for them to let you know whether you’re preapproved and how much you’ve been approved for. The preapproval process can take longer, however, if you have a past foreclosure, bankruptcy, IRS lien or poor credit.

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 impact on your monthly payments. If you only get preapproved with one lender, you’re stuck with what they have to offer. When you get preapproved with multiple lenders, you can choose the offer that’s best for you.

FAST FACTS

Will getting preapproved with multiple lenders hurt my credit scores?

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. But if any other mortgage lenders check your credit within 45 days of the first credit check, those checks won’t count as additional hard inquiries. To minimize the impact on your credit, aim to shop in that 45-day window. Learn more about how rate shopping affects your credit.

How long your preapproval is good for

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.


Bottom line

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