How To Get Preapproved For A Mortgage

Getting preapproved for a mortgage is an important step in the homebuying process: It gives you a solid idea of how much you can borrow, and it shows sellers that you’re serious about buying a home. In locations where the housing market is still competitive, a preapproval could also set you apart from other buyers as you’re bidding on homes.

Here’s a step-by-step look at how to get preapproved for a home loan.

What is mortgage preapproval?

A mortgage preapproval is a statement of how much a lender will let you borrow to buy a home. This is based on the lender’s review of your financial profile, including your income, assets in your savings and investment accounts, and your debts, as well as the results of a hard credit inquiry.

Why do you need a mortgage preapproval?

No matter if it’s a buyer’s market or a seller’s market, getting preapproved is essential for buying a home. Here’s what a preapproval does:

• Focuses your home search: Preapproval helps you understand your likelihood of being approved for a home loan and how much you may be eligible to buy. This means you can limit your home search to properties within your budget.
• Gives you credibility with sellers: Your preapproval makes your offer more compelling because it shows sellers you’re a serious buyer who’s likely to qualify for financing.
• Helps you rate-shop: Getting preapproved with multiple lenders makes it easier to find the lowest mortgage rate — or bargain for it — which could save you thousands over the loan’s term.

How to get preapproved for a home loan

1. Choose a few mortgage lenders

To get the best rates and fees, it’s important to shop around. At this stage, you’ll be selecting lenders — ideally three or so — with whom you’ll apply for preapproval. You can typically see rate quotes and review loan options online to get a sense of which lenders might be a good fit. You should also read lender reviews to learn about customers’ experiences.

Applying for more than one preapproval will allow you to compare mortgage offers later.

2. Gather personal and financial documents

You’ll need to supply documentation for a mortgage preapproval, which includes information about your income, assets and debts. These documents typically include the following:

• Pay stubs from at least the past 30 days
• W-2s from the past two years
• Proof of any other income sources, such as bonuses or commissions, child support or rental revenue
• Account statements — including checking, CDs and retirement savings — from at least the past two months
• Documents detailing any loans you currently have
• Letters explaining any new loans you’ve taken out recently
• Gift letters from anyone giving you money to use for a down payment
• Court records if you’re recently divorced or dealt with something like bankruptcy or foreclosure
• Contact info for your landlords if the lender wants to verify payment
• ID — such as a driver’s license or passport — so lenders can verify your identity and citizenship. Foreign nationals can get financing, but it’s much more complicated.

Self-employed professionals might need to undergo a more involved process. For example, a lender may review your business records, such as P&L statements.

Lenders typically ask for similar documents, so it’s best to have it all organized before you begin applying.

3. Check your credit report

During your preapprovals, lenders will run hard credit checks. Your credit score is important, because it helps lenders determine the risk of lending to you.

Consider checking your credit reports before your lenders do, in case there are errors that could impact your ability to get preapproved and obtain a favorable mortgage rate. Under federal law, you’re entitled to free copies of your credit reports from each credit bureau once per week. These can be obtained at AnnualCreditReport.com.

The minimum credit score lenders require varies by loan type:

Generally, the higher your credit score, the lower the interest rate and the better the mortgage terms a lender will offer you.

4. Check your debt-to-income ratio

Before you get preapproved, it’s a good idea to check your debt-to-income (DTI) ratio. Your DTI ratio is one of the biggest factors lenders consider when you apply for a mortgage. You can calculate this figure by adding up your monthly debt payments — including your prospective mortgage — then dividing this number by your gross monthly income, and multiplying that number by 100.

Most lenders require a DTI ratio of less than 50 percent to qualify for a mortgage, but the actual number depends on the lender. With a DTI ratio of 36 percent or less, you’ll typically get the most favorable loan terms and interest rate.

If your DTI ratio isn’t ideal, consider working on it before you apply. You can do this by paying off existing debt, making extra debt payments each month or increasing your income. You should also avoid opening any new credit accounts or loans.

5. Get preapproved

In many cases, you can get preapproved for a mortgage by submitting an online application. You may also be able to do it over the phone, and if you prefer, you can usually meet with a lender at a local bank branch.

During preapproval, lenders will verify the personal and financial information you submit and use it to decide if you qualify for a mortgage and, if so, how much to lend you.

If you do receive preapproval, you’ll receive a letter stating how much you’re approved to borrow and the preapproval expiration date. You’ll also see the loan type and terms in this letter.

Mortgage preapproval vs. prequalification

Preapproval and prequalification sound similar, but they differ in crucial ways.

• Prequalification: Prequalifying for a mortgage gives you a rough idea of the amount of financing you might be able to get. However, prequalifications are typically based on self-reported information that the lender doesn’t verify. There’s no commitment from the lender, and prequalifications aren’t very compelling to sellers.
• Preapproval: With a preapproval, the lender verifies your financial information and provisionally agrees to lend you a certain amount. A preapproval shows sellers that you can afford the purchase.

Mortgage preapproval vs. mortgage final approval

Just as prequalification and preapproval are different, preapproval differs from actually applying for a mortgage, too. While you’re very likely to receive a mortgage if you’re preapproved, it’s also possible to be preapproved and have your mortgage application rejected.

• Preapproval: Preapproval doesn’t guarantee you a loan; it’s just one step toward approval. The lender gives your finances a brief overview and, based on that, agrees in principle to loan you funds.
• Final approval: The lender authorizes your application to borrow funds to buy a particular property. It thoroughly reviews your finances and pending purchase, including verifying employment and income, and evaluating the home. If something unexpected comes back during this underwriting review — or if your financial situation changes — you might not qualify for a loan or find the details of your loan have changed.

The mortgage preapproval timeline

How far in advance should you get preapproved for a mortgage?

The best time to get a mortgage preapproval is before you start looking for a home. If you don’t, and you find a home you love, you likely won’t have time to get preapproved before you need to make an offer — and many sellers won’t even consider offers from buyers who aren’t preapproved.

How long does getting preapproved for a mortgage take?

Depending on your mortgage lender and whether you qualify, you could get a preapproval in one business day or less, but it could also take a few days, or even a week, to receive. And if you have an unusual financial situation, it can take even longer than that.

How long does a preapproval last?

Many mortgage preapprovals are valid for 90 days, though some lenders will only authorize a 30- or 60-day preapproval.

If your preapproval expires, getting it renewed can be as simple as your lender rechecking your credit and finances to ensure there have been no major changes to your situation. Just keep in mind that this might count as another hard pull against your credit, dropping your score by a few points.

What to do if you’re denied for mortgage preapproval

If your mortgage preapproval is denied, there are few steps you can take:

• Ask the lender why you were denied: If it’s an issue you can remedy, like an error on your credit report, you can address that right away and seek preapproval again once it’s resolved.
• Improve your credit score: If your credit score is too low or other financial roadblocks prevent you from being preapproved, you can work to improve those areas, too. Raise your credit score by making payments on time and paying down — or paying off — debt, for example, or lower your debt ratio by finding a way to increase your income.
• Apply through a different lender: Lenders have different thresholds for qualification, so another lender may approve you, even with the same financials. If you’re an existing account holder with a bank or a member of a credit union, it might be more willing to work with you on a preapproval.

FAQ

• Is there a cost associated with getting preapproved for a mortgage?
  

  Mortgage preapproval is free with many lenders. However, some lenders charge an application fee which you may have to pay upfront regardless of whether you’re approved.

• Can I get preapproved for a mortgage if I’m a first-time homebuyer?
  

  Yes, you can get preapproved for a mortgage as a first-time homebuyer. In fact, it’s essential to do it before you start seriously looking for a home. Plus, you may have access to first-time homebuyer assistance loans and programs.

• Can you be denied a mortgage after preapproval?
  

  Yes, it’s possible to get denied a mortgage after a preapproval. This could happen if you take on additional debt between the time you’re preapproved and the time you apply for a mortgage. Other financial changes, such as a reduction of income or unexpected large purchases, might also result in a mortgage denial.