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Buying a house can be challenging. But getting a mortgage preapproval before making an offer can make buying a house go a lot smoother and work out in your favor, especially in a hot housing market.
Home shop smarter, not harder. A mortgage preapproval letter proves that you not only want the house – but you’ve got the financial backing to buy it. It can turn a no into a yasss and make you more likely to stand out against other equally interested buyers.
Level up and get preapprovals from a few different mortgage lenders to compare. That will help you find the best loan terms for you and help you create a realistic house budget.
Falling in love with the seller’s home is romantic, but if you want your offer to be taken seriously, you’ll need to match that romance with finance. Make a strong offer with a preapproval letter in hand, and you’ll stand out from the home’s other suitors.
Here’s what you need to know before reaching out to a lender.
What’s a Mortgage Preapproval?
A mortgage preapproval is a lender saying that they’ve checked your finances and they’re willing to lend you up to a specific amount of money to buy a home.
The mortgage preapproval process helps determine how much an applicant can afford in the real estate market.
You may have carefully gone over your budget and did lots of calculating to figure out how much you can spend on a house, but you can’t be 100% sure about your math until a mortgage lender tells you what they’d loan you.
After examining a borrower’s financial history – including income, assets, debt and credit score – lenders can calculate an accurate maximum mortgage amount and an interest rate to go with it.
The lender puts all of that info in a preapproval letter that you can show to real estate agents and sellers.
What’s the Difference Between Prequalification and Preapproval?
At best, prequalification gets you a feel-good number that you can use to “ballpark” your house-buying budget. But here’s the important part: It doesn’t carry any weight with sellers.
A preapproval, on the other hand, can sway a seller’s decision when sifting through multiple offers on their house.
A prequalification is a good – but optional – starting point in the approval process. It’s a higher-level look at your finances. An overhead snapshot that uses basic information to figure out a rough estimate of how much house you can afford.
Mortgage preapprovals dig deeper, incorporating a thorough credit check and a full mortgage application. With all your money details, a lender can:
- Review your credit history and credit scores to gauge your creditworthiness.
- Calculate a debt-to-income (DTI) ratio and loan-to-value (LTV) ratio. Both are used to determine loan type and interest-rate eligibility.
When Should You Get Preapproved For a Mortgage?
The best time to get a preapproval depends on your personal circumstances, but consider getting the ball rolling at one of these two points:
- At the start of the house-hunting process
- When you go from casual house hunting to obsessing over houses
Adding a proactive prequalification to the mix
If you’re worried about getting a mortgage because of financial difficulties or your credit history, a proactive prequalification 6 – 12 months ahead of house hunting can be a smart move.
Use the prequalification to uncover any credit, debt or income issues. Checking this far ahead will give you enough time to work on any financial matters before you apply for preapproval. And because a prequalification is considered a “soft pull,” it won’t affect your credit.
Even if you’re confident about your score and your financials, you may still want to consider an early prequalification. At the very least, it can provide you with some extra peace of mind.
What Are the Nuts and Bolts of How To Get Preapproved for a Mortgage?
The mortgage preapproval process is similar to applying for a home loan. We’ve broken it all down here (of course), but you’ll be walked through this process by a lender’s loan officer (the human assigned to guide you through the mortgage loan application).
Factors that impact your preapproval
Several variables go into the loan application process, including:
- Debt-to-income (DTI) ratio
- Loan-to-value (LTV) ratio
- Credit history and credit score
- Income and employment history
Documents needed for mortgage preapproval
You may be in a good financial position, but lenders won’t just take your word for it. Yes, they need proof.
Before diving into the application process, pull your paperwork together, including:
- Proof of income, including two years of W-2 or 1099 statements, or a Schedule K-1 (Form 1065) as well as 30 days of pay stubs or bank statements if you’re self-employed
- Employment verification, using either tax documents or a letter from your employer
- Proof of assets, including any statements from retirement, savings and brokerage accounts
- Credit history
- Federal identification, like a license or passport
- Social Security number
- Divorce papers (if applicable)
- A gift letter (if you’re using a financial donation to help you make a down payment)
While there’s a chance that your lender will ask for more documents, the ones listed above are a great place to start.
Mortgage preapproval checklist
Think you’re ready to ask a lender for a preapproval letter? Use this checklist to make sure that you’re not forgetting anything important.
These quick steps can help you prepare to work with the mortgage lenders you request a preapproval from (and keep you from getting surprised by anything along the way):
- Get a free credit report and get comfy cozy with your score and history.
- Scan through your recent loan and credit card statements and make sure there are no errors on your report.
- Calculate your debt-to-income ratio (your total monthly debt payments divided by your gross monthly income).
- Collect all the documents you’ll need for the preapproval application (see above).
- Contact multiple lenders – we recommend three.
- Fill out the lender’s application, which typically asks for:
- Type of mortgage and terms of the loan
- Property information and purpose of the loan
- Borrower information
- Employment information
- Monthly income and combined housing expense information
- Assets and liabilities
- Transaction details and declarations
- Get your preapproval letter. (And don’t feel ridiculous if you proudly gaze at it multiple times a day. It’s an accomplishment!)
How Long Does a Mortgage Preapproval Last?
As nice as it would be if a mortgage preapproval letter had the staying power of “The Simpsons,” that’s not how the world works. Mark your calendars because, depending on the lender, a preapproval letter is only good for 60 – 90 days.
The expiration date will be in the letter. You’ll need to keep a close eye on the date as you make offers on houses.
This doesn’t mean that a letter that’s close to its expiration is a lost cause. Some lenders are willing to renew a preapproval for another 60 – 90 days. It never hurts to ask.
Why You Should Get Preapproved by a Few Lenders
Going through the preapproval process more than once might feel a little daunting – but it’s worth it. Why?
First, the more lenders you seek approval from, the more offers you have to show to sellers. It’s like having everyone at your job recommend you for a new job instead of just the new guy, Dale.
Some lenders may even have something better to offer than the competition, like a lower interest rate that could potentially save you thousands of dollars.
How mortgage preapproval affects your credit score
Wondering if mortgage preapproval affects your credit score? Well, the answer is yes – but it won’t threaten your chances of getting a mortgage.
A lender will do a hard credit check during the preapproval process (also called a hard credit inquiry or hard credit pull). Heads up – the check could lower your credit score temporarily (for no more than 12 months).
Knowing how “not fun” that must sound, our advice to reach out to more than one lender may begin to sound counterintuitive, knowing that your credit score has a big impact on the mortgage amount and loan terms you’ll be offered.
Yes, it’s true that a hard credit pull will ding your credit, but the drop is usually no more than a few points – and it won’t impact your ability to get a mortgage loan.
Not only will lenders understand why your credit score dropped, but there are laws in place to protect consumers who are comparison shopping mortgage rates.
Also, because it’s understood that borrowers may compare offers from several lenders, multiple hard credit checks performed in a short period of time will only be counted as one credit check.
For your FICO® Score, which is what most mortgage lenders look at, this window of time usually lasts 45 days. If lenders are looking at your VantageScore®, the window could be as short as 2 weeks. Play it safe and limit your lender shopping to 14 days.
Show Lenders and Sellers You’re Ready, Willing and Able To Buy
On a mission to get some house keys? Nothing says “You should seriously sell me that house” like a mortgage preapproval.
With a preapproval letter in hand, you can wade confidently into the roughest house-hunting waters (riding on one of those inflatable unicorns, maybe). 🦄