After years of paying rent, wrangling roommates and asking your landlord permission to do anything besides put up temporary wallpaper in your apartment, it’s finally time to buy your own home. Unless you plan to pay for the home with cash, you’ll need to get approved for a mortgage.
Before you check out any real estate listings, it’s important to get a preapproval letter from a lender. A mortgage preapproval letter indicates that a mortgage lender may be willing to lend you money to buy a home.
This guide explains what’s in a preapproval letter and walks you through the process of getting one.
What Is a Mortgage Preapproval Letter and Why Does It Matter?
Preapproval doesn’t guarantee a borrower will qualify for a mortgage, but it’s an important step in the home buying process.
A preapproval letter shows a seller that you have a good chance of qualifying for a mortgage, making them more likely to accept your offer. In fact, a real estate agent might require a preapproval letter before touring any homes with you.
Applying for mortgage preapproval is the first step of the mortgage preapproval process. You provide information about your finances – like bank statements, tax returns and pay stubs – to a lender. The lender uses that information to determine whether you meet their requirements for mortgage approval.
The lender will also run a credit check to examine your credit history. They’ll review the total amount of debt you have, your payment history and any bankruptcies, tax liens, etc.
If you qualify for mortgage preapproval, the lender will give you a letter that spells out how much they’re willing to lend you to buy a home. The letter typically includes:
- Your name
- The lender’s name
- The loan’s interest rate
- The loan amount
- The home’s purchase price
- The length of the loan
- The property type (condominium, townhouse, single-family home, etc.)
Some preapproval letters may contain information about the mortgage loan type you qualify for, such as a fixed-rate loan or an adjustable-rate loan, the amount of your down payment and LTV (a comparison of the loan amount with the value of the property).
Benefits of mortgage preapproval
A mortgage preapproval letter comes with many benefits:
- You know your price range: A preapproval letter lets you know the maximum amount you can borrow. If you know you’re preapproved for $275,000 by a lender, you won’t waste precious time looking at houses in the $300,000 range.
- You get a competitive advantage: A seller may not know you, but they do know you’re working with a bank that will likely qualify you for financing. Preapproval may ease any concerns a seller may have about accepting your offer. You may even score a competitive edge over buyers who haven’t been preapproved.
- You save time: Once you find a home, a preapproval letter reduces the amount of time it takes to close on the loan. Imagine having an offer accepted and having to wait until a lender completes their review of all your financial documents. If you’re buying in a market where time is of the essence, wasted time could mean losing a home.
Preapproval vs. Prequalification: What’s the Difference?
Many first-time home buyers get confused about the difference between a mortgage preapproval and a mortgage prequalification. Well, the first thing you should know is that when you’re shopping for real estate, it’s better to be preapproved than prequalified.
When you get prequalified, you provide information about your finances – but the lender doesn’t verify the information. A prequalification letter assumes you provided an accurate picture of your finances and credit.
Lenders don’t use the honor system for mortgage preapprovals. They perform a hard credit check and verify every piece of information you provide.
Spoiler alert: A mortgage prequalification letter or preapproval letter does not guarantee financing from a lender. However, a loan is more likely to close if you get preapproved rather than prequalified.
How Do I Get Preapproved for a Mortgage?
To get preapproved, your lender needs to review your income and assets and verify your identity. This means collecting paperwork to support your application, including:
- Proof of income: Borrowers will typically submit pay stubs, W-2s and 1099s as proof of income. If you’re a self-employed borrower, you may need to provide a business tax return, a balance sheet and/or a profit and loss statement.
- Debt-to-income (DTI) ratio: Your DTI is the amount of debt you carry compared to your pretax income. In addition to pay stubs, you may need to provide information about your credit account balances and any other debt to prove that your DTI meets the lender’s requirements.
- Proof of assets: Bank statements, insurance policies and documentation related to stocks, bonds and other investments can help confirm the value of your assets.
- Employment verification: Pay stubs are a good start, but you can make the preapproval process easier by asking your employer to write a letter confirming your employment. The letter should include your date of hire and your annual pay.
- Identification: You can submit your birth certificate, government-issued photo ID or passport and a copy of your Social Security card to prove your identity.
- Credit history: Your lender will pull your credit report from the three major credit bureaus (Equifax®, Experian™ and TransUnion®), but you should also consider submitting any paperwork related to your credit cards, auto loans and personal loans.
Once you’ve collected your paperwork, the next step is to fill out the preapproval application. Most preapproval applications include the following information for you and/or your lender to fill out:
- Mortgage type: The application should state whether you’re interested in a fixed-rate loan, a conventional loan or another type of mortgage.
- Mortgage terms: Before you submit your application, you need to know the interest rate and the term of the loan.
- Personal information: Provide your name, marital status, Social Security number and other personal information.
- Purpose of the loan: You must tell the lender if you want to purchase an existing home, refinance your current mortgage or build a brand-new home.
- Residency: You may need to indicate whether you plan to live in the home, use it as a second home or rent it out.
- Employment: Your lender needs your monthly income, job title and date of hire. If you’ve held your current position for less than 2 years, you’ll need to provide the same information from your previous job(s).
- Income and housing expenses: You’ll need to provide your monthly income, and if it applies, commission income and investment income. The lender also needs to know how much you pay for housing, including the cost of property taxes and insurance or how much you pay for rent.
- Liabilities and assets: Liabilities are what you owe; assets are what you own. You’ll need to document both. Be prepared to provide information about bank balances, investments, child support, alimony payments, etc.
- Loan details: The mortgage preapproval application should include the loan amount, the home purchase price, information about any required mortgage insurance and estimated closing costs.
After you complete the application, your lender should give you a loan estimate indicating how much you’ve been preapproved for and the terms of the loan.
Once You’re Preapproved
Just because you’re preapproved doesn’t mean you can slack off on your finances. Remember, preapproval isn’t final approval. It’s important to stay current on your bills, avoid taking on new debt and continue to save for your down payment.
Once your application is ready to move to the approval stage, you’ll complete a formal mortgage application. Every piece of information you provide will be verified by an underwriter to help the lender decide whether they should approve your loan.
BTW, this is not the time to change jobs, apply for another loan or open multiple credit cards. Any potentially negative changes to your income or credit may jeopardize final approval.
You should get preapproved before you start looking at real estate. Getting a preapproval letter gives you an idea of how much financing you can expect to get, letting you know how much home you can afford to buy.
After you apply for preapproval, the lender has 3 business days to issue a loan estimate preapproval letter.
Market conditions are always changing, so mortgage preapprovals don’t last forever. Most preapproval letters last 30 – 60 days.
Multiple preapproval letters aren’t required, but applying with multiple lenders may help you find the best deal. You can get as many mortgage credit pulls as you want within 14 days and it’ll only count as a single hard credit inquiry. Sometimes this can go up to 45 days, but usually it’s 14 days.
That hard credit inquiry can cause a slight, temporary drop in your credit scores. Too many hard credit inquiries back-to-back can drop your score even more and possibly affect your chances of loan approval. So try to apply for all of your preapproval letters within that 14-day window.
A Mortgage Preapproval Letter: The Golden Ticket
Although a mortgage preapproval letter doesn’t guarantee you’ll be approved for a loan, it streamlines the application process and helps you determine how much you can afford to spend when you’re house hunting.
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