What’s a Preapproval Letter for a Mortgage?

During your home buying journey, your real estate agent or a home seller might ask you to provide them with a mortgage preapproval letter. This document is a clear signal that you’re serious about buying a home and can make a serious offer.

In some cases, not having a preapproval letter might keep you from making an accepted offer on a home. We’ll go over the crucial information contained in the letter and what you need to do to get one.

What Is a Mortgage Preapproval Letter?

A mortgage preapproval letter is a non-binding agreement from a mortgage lender that shows what type of mortgage you qualify for and the size of the loan. In other words, a preapproval letter is proof you’ve gone through the preapproval process.

The key thing to remember about preapproval letters is that they’re non-binding. This means a lender’s assessment of your ability to qualify for a mortgage can change if your financial situation changes. It also means you aren’t committed to the lender. Nothing is stopping you from changing lenders if you get a better offer.

What Does a Mortgage Preapproval Letter Look Like?

A preapproval letter communicates that you would likely qualify for a mortgage.

The letter will include your name and address, the name and contact information of your prospective lender and:

• The maximum loan amount and loan-to-value (LTV) ratio: This indicates the size of the loan and the maximum home value the lender will approve. The amount could affect your required down payment.
• The type of loan: You may be approved for a conventional or a government-backed loan, like a Federal Housing Administration (FHA) loan.
• The loan terms: Terms include the length of the loan, the interest rate and whether the loan is a fixed-rate mortgage or an adjustable-rate mortgage (ARM).
• The approved property types: Your loan may be limited to primary residences or may not allow you to buy a condo or other type of shared housing. 

Why Do You Need a Mortgage Preapproval Letter?

Getting a preapproval letter is a critical component of the mortgage application process. The letter can help you:

• Know your price range: A preapproval letter indicates the amount of money a lender is willing to lend you to buy a home. While you may not buy a home at your maximum preapproval limit, it’s useful for home buyers to know this number.
• Build trust with the seller: A mortgage preapproval letter demonstrates to sellers and other relevant parties that you’re a qualified buyer who’s likely to make an offer soon.
• Shorten the approval process: Preapproval lays the groundwork with a potential lender and helps accelerate the final approval process. You might close on your dream home even sooner.

What is a preapproval letter vs. a prequalification letter?

Prequalification letters and preapproval letters can help you move through the home buying process, but most home sellers prefer a preapproval letter. 

A prequalification letter is easier to get because you don’t need to provide as much information to a potential lender. Before issuing you a preapproval letter, a lender must review supporting documentation. Because of that, preapproval letters carry significantly more weight than prequalification letters.

How Do You Get a Mortgage Preapproval Letter?

To get a preapproval letter, you’ll need to go through the mortgage preapproval process. This includes submitting paperwork that supports what you’ve told a lender about your income and debt obligations, including tax returns, pay stubs, W-2s, bank statements and more.

When should you get preapproved for a mortgage?

Most preapproval letters are only valid for a limited time. If you wait too long before you make an offer on a home, you may need to restart the preapproval process from scratch.

Your lender should specify how long the preapproval letter is valid. Preapproval letters are typically valid for 30 – 90 days, but you may be able to extend the duration of your preapproval letter. Ask your lender how and when you can do this.

How long does a preapproval for a mortgage take?

The time it takes to be preapproved for a mortgage will depend on the lender. Once you’ve submitted all the necessary paperwork, most preapproval applications are approved or declined within 3 business days. In some cases, you may be able to get your letter within 24 hours.

How many preapproval letters should you get?

Getting multiple preapproval letters could potentially help you get a better deal because you can compare lender offers. And in a competitive market, you may be able to use an offer letter as leverage to convince another lender to extend a better offer.

But you must be careful if you apply for multiple preapproval letters. Most preapprovals require a hard check on your credit. Hard checks can temporarily lower your credit scores by a few points. 

To help avoid the impact of applying for multiple preapproval letters, submit all of your preapproval applications during a 14-day window. The credit bureaus will treat the hard checks as a single hard check.

Is the preapproval process different for government-backed loans?

The preapproval process will be the same whether you use a government-backed loan or a conventional mortgage to buy a home. However, government-backed loans may require additional forms and paperwork to prove you will qualify (such as a VA loan)..

Securing Your Preapproval Letter Is an Important Step

Getting preapproved to buy a home is an important step in the home buying process. This step doesn’t give you “total clearance” to close, but securing a preapproval letter can mean you’re accelerating your progress toward the closing table. It could also give your offer the extra weight it needs to be selected by the seller.