Get Pre-approved For A Mortgage

Scrolling through attractive online listings might spark your dream-home desires, but the serious homebuying process kicks off when you reach out to a lender and get preapproved for a mortgage. Although preapproval is not legally binding, it provides a clear indication of how much a lender is willing to lend you and the types of mortgages you may qualify for. After completing this process, you’ll receive a preapproval letter from the lender.

Alternatively, pre-qualification offers a similar estimate of your borrowing potential, but it’s a more informal process based on self-reported financial information.

Preapproval, however, is backed by your financial documentation, making the preapproval letter more significant. While pre-qualification helps you set a realistic budget, a preapproval letter demonstrates to real estate agents and sellers that you have the financial backing to purchase a home and are prepared to move forward.

Once you’ve gathered the necessary information, you can begin exploring lenders who may be a good match. Many lenders offer preapproval portals on their websites to facilitate this process.

What is mortgage preapproval?

A mortgage preapproval is a document or letter from a lender that outlines the maximum amount they are willing to lend you for purchasing a home. This preapproval is issued after you submit an application and is based on an assessment of your financial situation, including your income, savings and investment assets, and existing debts.

As part of the preapproval process, the lender will conduct a hard credit inquiry. This helps them estimate how much home you can afford based on your financial profile.

Receiving a preapproval means you qualify for financing, and the lender is ready to proceed with the loan, provided the property you choose meets certain conditions and there are no significant changes to your financial status before you finalize the mortgage.

Mortgage preapproval vs. prequalification

Preapproval and prequalification may sound similar, but they have important differences.

Prequalification: This is a more informal process that gives you a rough estimate of how much financing you might be able to obtain. Typically, lenders only perform a soft credit inquiry, which is less thorough than a hard inquiry, and they do not verify the information you provide. As a result, there’s no firm commitment from the lender. While you can receive a prequalification letter, it carries less weight with sellers.

Preapproval: This process is more detailed, involving a thorough review and verification of your financial information by the lender. A preapproval letter indicates that you are eligible to borrow up to a specified amount, making it a stronger tool when making an offer on a home. It demonstrates to sellers that you have the financial capability to complete the purchase.

In essence, preapproval provides a more reliable indication of your ability to secure a mortgage compared to prequalification.

Mortgage preapproval vs. mortgage final approval

Just as prequalification and preapproval are distinct, preapproval also differs from final mortgage approval.

Preapproval: This step doesn’t guarantee you a loan; it’s an initial agreement based on a preliminary review of your finances. The lender agrees in principle to lend you funds, but it’s only a provisional step toward securing the loan.

Final Approval: This is the stage where the lender fully authorizes your application to borrow money for a specific property. It involves a comprehensive review of your financial situation, including verifying your employment and income, and assessing the property itself. During this thorough underwriting process, if any issues arise, you might not qualify for the loan or the terms of your loan might change.

How to Obtain Preapproval for a Home Loan

To get preapproved for a mortgage, you can usually apply online and discuss your application with a lender over the phone if needed. If you prefer a face-to-face interaction, you can often visit a lender at a local bank branch. Regardless of your approach, follow these steps:

Select a Mortgage Lender Research various lenders to find the best rates and fees. Compare different options, read reviews to gauge past customer experiences, and apply with multiple lenders to compare their mortgage offers.

Review Your Credit Report A hard credit check by the lender is required for preapproval to ensure your credit score meets their standards. Check your credit report beforehand to address any errors that might affect your preapproval or mortgage rate. Under federal law, you can get free copies of your credit reports from each bureau once per year at AnnualCreditReport.com.For a conventional mortgage, a minimum credit score of 620 is typically required, though this can vary by lender. FHA loans generally need a minimum score of 580 with a 3.5 percent down payment. Other government loans, like VA and USDA loans, don’t have federally mandated credit score requirements, leaving it up to the lender to set their own. Generally, a higher credit score will result in better mortgage terms and lower interest rates.

Complete the Preapproval Process Lenders offer flexibility for preapproval, allowing you to apply either online or in person. Lenders often use the “28/36” rule to assess affordability: ideally, your mortgage payment should not exceed 28 percent of your gross monthly income, and your total debt payments (including the mortgage and other debts) should be no more than 36 percent of your gross monthly income. During the preapproval process, the lender will conduct a hard credit inquiry to evaluate your credit utilization ratio. A lower ratio (the balance on your credit cards relative to your total credit limits) improves your chances of preapproval. While a hard credit pull may slightly lower your credit score, this impact is minimal and temporary, typically lasting only two years. To mitigate the effect on your credit score when comparing offers, try to get preapproved by multiple lenders within a 45-day period, as multiple inquiries within this timeframe are often counted as a single inquiry. After reviewing your credit and financial profile, the lender will determine whether you’re preapproved for a mortgage. If approved, you’ll receive a preapproval letter detailing the loan amount, maximum home purchase price, loan type, terms, and the expiration date of the preapproval.

Benefits of a getting preapproved for a home loan

Regardless of whether it’s a buyer’s or seller’s market, securing preapproval is crucial when purchasing a home. Here’s what preapproval offers:

Credibility with Sellers: A preapproval demonstrates to sellers that you’re a serious buyer with a strong chance of securing financing, making your offer more attractive.

Targeted Home Search: With preapproval, you can narrow your search to homes within your budget, helping you save time and avoid the frustration of falling for properties that are beyond your financial reach.

Rate Comparison: Obtaining preapproval from multiple lenders allows you to compare mortgage offers and potentially negotiate a lower interest rate, which can save you significant amounts over the life of the loan.

Mortgage preapproval timeline

If you begin the mortgage preapproval process early, stay organized, and monitor your application closely, you can expedite the process. The sooner you obtain preapproval, the sooner you can start your serious home search.

When Should You Get Preapproved for a Mortgage?
Ideally, you should secure mortgage preapproval before you begin house hunting. Waiting until you find a home you like could delay your ability to make an offer on that property. Additionally, sellers often require a mortgage preapproval letter as part of your offer and certainly before finalizing any contract. As soon as you are serious about buying a home and have your finances in order, you should apply for preapproval with a reliable lender.

How Long Does It Take to Get Preapproved?
The time frame for preapproval can vary. Depending on the lender and your financial situation, you might receive preapproval in as little as one business day, though it could take several days to a week. If an income audit or additional verification is needed, the process might take longer. Generally, with your paperwork organized and your credit and finances in good shape, you can get preapproval relatively quickly.

How Long Is a Preapproval Valid?
Most mortgage preapprovals are valid for 90 days, though some lenders may issue preapprovals for only 30 or 60 days. If your preapproval expires, renewing it usually involves a simple recheck of your credit and financial status. Be aware that this renewal might result in another hard credit inquiry, which could slightly impact your credit score.

What to do after you are preapproved

Let the search begin! Having a preapproval letter demonstrates your commitment to buying a home and shows that you’re financially prepared.

Preapproval letters are only valid for a limited time, so start house-hunting promptly after receiving yours. If your financial situation changes significantly or if the home you’re interested in appraises for much less than expected, you might not receive the mortgage amount you were preapproved for.

Once you find a suitable home and your offer is accepted, you’ll need to formally apply for the mortgage. Even with preapproval, the full mortgage approval process can take several weeks as the lender reviews your finances and the property, including conducting an appraisal to determine its market value.

During this waiting period, keep an eye on mortgage rates. Your preapproval doesn’t secure a specific rate, so you’ll need to complete a formal mortgage application to lock in your rate.

What to Do If You’re Denied for Mortgage Preapproval
If your preapproval application is denied, inquire with the lender about the reasons for the rejection. If the issue is something you can fix, such as a credit report error, address it and reapply once resolved.

If your credit score is too low or there are other financial obstacles, work on improving these areas. For example, you can enhance your credit score by making timely payments and reducing debt, or lower your debt-to-income ratio by increasing your income.

Some lenders have strict qualification criteria, so consider approaching a different lender with more flexible requirements. If you’re an account holder at a local bank or a member of a credit union, these institutions might be more accommodating in helping you secure preapproval.

Bottomline

Mortgage preapproval is a crucial step in the home-buying journey. It provides you with a clear understanding of the loan amounts and interest rates you can anticipate from various lenders and demonstrates to potential sellers that you are ready to proceed with a purchase.