When you’re ready to take the leap into homeownership, your first step is mortgage preapproval.
A mortgage preapproval establishes your home buying budget and tells real estate agents and Realtors that you are a serious buyer in a competitive housing market.
It’s crucial to get pre–approved before you try to make an offer on a home, or even start house hunting. Here’s how to do that.
Begin your mortgage preapproval today. Start here (Jan 7th, 2022)
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What is mortgage preapproval?
A mortgage preapproval is when a lender determines you’re qualified for a home loan.
Your preapproval letter shows the maximum loan amount you’re approved for (your home buying budget), as well as the specific interest rate and loan term you can expect.
To get preapproved, lenders will assess your full financial situation, including your credit and income.
This is different from a mortgage prequalification, which requires no documents and won’t give you the backing you need to make an offer on a house.
How to get preapproved for a mortgage
The preapproval process varies from lender to lender. But it generally involves a loan application, a credit check, and various forms of documentation.
Many mortgage lenders let you complete the whole preapproval process online. But if you want, you could also do it over the phone or in person.
Step 1: Complete a home loan application
To get preapproved, you need to fill out a mortgage loan application. Your lender will usually let you complete your loan application online, over the phone, or in person. Online applications typically take 10–20 minutes to complete.
The loan application, also known as Form 1003, asks for your personal information, social security number, financial information, and loan information.
After your application is completed, the lender will pull a three–bureau credit report known as a tri–merge. This report shows your credit scores and credit history from the major credit–reporting agencies: TransUnion, Equifax, and Experian.
Note, you can apply and get preapproved with any lender you wish. You can even get pre–approved by more than one lender to find the best offer.
Preapprovals are non–binding, and you’re free to switch lenders before taking out the loan.
Step 2: Document your income and assets
Your lender will require documentation to support the info in your loan application. This is what makes getting preapproved different from getting prequalified.
Typically, your lender will require the following documents for mortgage preapproval:
- Identifying documents such as a valid driver’s license or photo ID
- Last two years’ W–2s and/or 1099s
- Last two years’ tax returns
- Profit & Loss statement if self–employed
- Pay stubs for last 30 days, if applicable
- Statements from bank accounts, retirement accounts, and other asset accounts
- Divorce decree or separation agreement, if applicable
- Contact information for your landlord(s) for the last two years, if you’re a first–time home buyer. If you are currently a homeowner, your housing payment history will show up on your credit report
To speed up the preapproval process, it helps to have these documents in hand before you get started.
Some lenders can pull documents directly from your employer and bank, but not all. Some can also verify your income with the IRS, with your consent.
Step 3: Your mortgage lender completes the pre–approval
Once you’ve filled out your loan preapproval application, turned in your documents, and paid your application fee (if applicable), your work is done. The last step, underwriting, is up to your lender.
Most lenders use a universal automated underwriting system (AUS) to pre–approve customers for home loans. AUS is a technology–driven underwriting process that provides a computer–generated loan decision.
In other words: You don’t have to wait for a human underwriter to read through all those documents and approve or deny you.
By using automated underwriting, lenders can render near–instant preapproval decisions that could take up to 60 days to complete via manual processing.
Begin the mortgage pre-approval process. Start here (Jan 7th, 2022)
Preapproval versus prequalification
It’s easy to confuse mortgage preapproval with mortgage prequalification (especially because mortgage lenders often make up their own names for these steps).
But you shouldn’t mix up these two processes. A preapproval letter gives you verified home buying power, whereas a prequalification letter estimates your home buying budget without verifying your eligibility.
Getting prequalified involves an informal interview with a mortgage lender.
The lender will ask about your credit, monthly income, assets, and monthly debts. Then they’ll give you a general idea of the price range you could afford and how much cash you’d need to purchase a home.
Prequalification helps inform your home search by giving you a rough approximation of the home prices you can generally afford. But since none of your financial information has been verified yet (only stated), this might not be as useful when it comes to actually making an offer.
To make an offer, you need a preapproval letter.
Preapproval requires all the same information as prequalification, but the lender goes one step further by actually verifying the information you provide. That means it will look into your credit report, employment history, assets, and income.
To get a preapproval letter, you’ll complete a full loan application. That includes submitting documents like W2s and bank statements, and authorizing a hard inquiry on your credit, to support the information you provided verbally.
With a preapproval letter in hand, you’re free to make an offer on a house within your price range. The seller now has proof that you’re a serious buyer who should be good for the amount stated.
“Some lenders will go a step further and can even get you fully underwritten at this time,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
In this case, Meyer says, “your letter is what we call and ‘advanced approval,” where your offer needs no financing contingency.”
Can you get denied after being preapproved for a mortgage?
Yes, you can get denied for a mortgage loan even after being preapproved for it. There are a number of reasons this could happen. For example:
- After preapproval, new negative information could appear in your credit history, dropping your score below the lender’s qualification guidelines
- If you lost your job prior to closing on the loan, you’d likely be denied. That’s because the lender can no longer verify you’ll be able to make your monthly payments
- Running up too much credit card debt before the loan closes
Basically, anything that significantly impacts your financial picture between your preapproval and loan closing could change your mortgage eligibility.
Also keep in mind that a preapproval typically happens prior to beginning your home search. As such, your new home must also be approved by the lender.
For example, the loan amount can’t exceed the home’s appraised value. And if you’re getting an FHA loan or a VA loan, the new home must meet government safety standards. The presence of lead paint in an older home, for example, could derail the home–buying journey.
Verify your mortgage eligibility. Start here (Jan 7th, 2022)
Common mistakes during the preapproval process
Any changes to your mortgage application after getting preapproved could affect your eligibility, interest rate, or home buying budget.
After getting preapproved for a mortgage, try to maintain the status quo until you close on the home. For example:
- Keep the same job
- Delay major purchases that could impact your credit or debt–to–income ratio
- Protect your savings account
- Gather documentation for any large deposits into your bank accounts
If you do have any major changes in any of these areas, be sure to contact your lender as soon as possible.
Otherwise, by holding steady, you should be able to keep your mortgage preapproval intact and your home offer secure.
Mortgage preapproval FAQ
Most mortgage preapprovals require a hard pull on your credit, which can affect your credit score. But the impact is usually very small. According to myFICO, one hard inquiry will take less than five points off your FICO score. (For perspective, the full scoring range is 300–850.) And if you get multiple pre–approvals within 2–4 weeks of one another, they all count as a single hard inquiry – so your score will only be dinged once.
Mortgage preapproval letters are typically valid for anywhere from 30 to 90 days. However, a preapproval can be updated and extended if the lender re–checks your information. The preapproval letter serves as evidence that a lender has reviewed your credit and verified your income and assets.
Getting preapproved is similar to getting prequalified, except a preapproval requires all the information you provide to be documented. For a preapproval, you typically have to complete a full mortgage application and maybe pay an application fee. You will then supply the lender with financial documentation like pay stubs, tax returns, and W2s, and your credit history and score will be pulled. Some sellers might also request to see your asset and bank account statements.
Preapproval is free with many lenders. However, some charge an application fee, with average fees ranging from $300–$400. These fees may be credited back toward your closing costs if you move forward with that lender. However, since preapproval does not tie you to a lender, we’d recommend starting out with one that offers a free preapproval. You can always choose a new lender later on if you find a lower mortgage rate.
The timeframe for getting pre–approved varies by lender. Most lenders take one to three days. Banks and credit unions may take up to 30 days. For the fastest preapproval, look for a lender that specializes in digital loan applications.
Most lenders recommend getting preapproved 3–6 months before you plan to buy a home. If you foresee roadblocks for your loan (like having to improve your credit score or pay off debts), you may want to get your first preapproval up to a year prior to your home purchase. That should give you enough time to clean up your credit report and increase your down payment.
Preapproval letters vary from lender to lender. They typically include the purchase price, loan program, interest rate, origination fees, loan amount, down payment amount, expiration date, and the property address. The letter is typically submitted with your offer to buy a new home.
If you need to switch loan programs after getting preapproved – from a conventional to an FHA loan, for example – you’ll likely need to start the preapproval process all over again with a new loan application. Doing this would likely delay your closing and change the interest rate and terms of your loan. Different mortgage options also have different down payment requirements. To help avoid these kinds of delays, identify your ideal loan type near the beginning of your home buying process. A knowledgeable loan officer will advise you on your best mortgage option upfront. Find a new loan professional if you’ve found they steered you in the wrong direction – for instance, you’re a veteran or are buying in a rural area and he or she suggested an FHA loan instead of a zero–down VA or USDA loan.
A seller’s real estate agent may not want to show a home unless you have a preapproval letter. Your own agent would likely show the property; however, most real estate agents prefer working with homebuyers who have been preapproved. The preapproval letter proves you’re a serious buyer and borrower.
Yes. Mortgage underwriting depends, in part, on your other debts as measured by your debt–to–income ratio. Credit cards, auto loans, student loans, and other personal loans will factor into your DTI. If your debt–to–income ratio is too high, lenders will be wary about your financial situation and your ability to make monthly mortgage payments. They could deny your application. After getting preapproved, avoid applying for other loans or increasing your credit card balances before the home closes.
Start the preapproval process
If you’re ready to start house hunting – or even considering it in the near future – it’s time to start the mortgage process by getting preapproved for a home loan.
The approval process will help you lock in your borrowing power and give you an advantage in a competitive housing market. It’ll also turn up relevant issues, like a low credit score, that you might fix before beginning your homeownership journey.
Ready to get started?
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The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.