A Comprehensive Guide To Mortgage Preapprovals

The single most important step toward buying a house is to get a mortgage preapproval. Not only will this give you a clearer picture of exactly how much you can afford to spend, but sellers often look at preapproval as an indication of the seriousness of the buyer.

In this article, we’ll cover how to get preapproved for a home loan and why it’s an essential part of the home buying process.

What Is A Mortgage Preapproval?

A mortgage preapproval is a determination by a lender of the amount you’ll be able to afford when you’re looking to buy a home. The lender makes this determination by reviewing your credit report, income, assets and debts. You can go home shopping without a preapproval, but it helps buyers determine their budget and address potential issues that could prevent financing. 

A mortgage preapproval isn’t a commitment to lend, and how long it lasts falls between 60 – 90 days from your date of approval. Your house still has to be appraised to qualify for whichever mortgage option you’re exploring. Additionally, because you often can’t lock your rate until you find the property, the approval amount and monthly payment are based on a hypothetical interest rate.

While a mortgage preapproval isn’t an ironclad guarantee that your loan will end up closing, having a preapproval does show sellers that you’re serious in your intent to purchase a home and have the financial resources to follow through.

The only catch is its effect on credit. A mortgage preapproval can lower your credit score by a small amount as it typically requires a hard inquiry. However, several credit checks from mortgage lenders within a 45-day window only count as a single inquiry on your credit report. During this time, you can shop around and get multiple preapprovals and loan estimates.

Why Should You Get A Preapproval For A Home Loan?

There are several reasons to get a mortgage preapproval: 

• A preapproval strengthens your offer. Sellers and their real estate agents want to know that they can be reasonably assured that your offer won’t fall through. Having a home loan preapproval is even more important when inventory is tight. If you get into a bidding war, sellers may not accept your offer if you don’t have a financing plan in place. You may also be competing against other people who are offering cash, so being able to show certainty in your offer with a strong preapproval is extremely helpful.
• A preapproval helps you shop for homes within your budget. A preapproval helps you determine how much house you can afford when house hunting, especially if your documentation has been verified. By knowing what a lender is willing to let you borrow, you can narrow down your house search and move quickly when you find the right home.
• A preapproval can help reduce the time it takes to close. If you get income and asset documentation compiled in advance, you can also save yourself time down the line in the process and potentially reduce how long it takes to close. There are many things that can temporarily hold up the process like the appraisal, inspection and title work, but documentation will be one less hurdle to overcome.

Mortgage Preapproval Vs. Prequalification Vs. Final Approval

Before we go further, it’s useful to distinguish between preapproval versus prequalification versus final approval. Some lenders use these terms interchangeably, but they’ve traditionally held different meanings. To avoid confusion, let’s go over the terms.

How To Get Preapproved For A Mortgage

Now that you understand the importance of the mortgage preapproval, let’s run through the process.

1. Know What Factors Lenders Consider For Preapproval

Lenders consider several factors for mortgage preapproval, including:

• Credit: The minimum credit score depends on the type of mortgage, but most conventional loans require a credit score of at least 620.
• Employment: Lenders will verify your employment using pay stubs and may call the employer to confirm employment and salary. If you’re self-employed, lenders may require additional information about the financial stability of your business.
• Income: To confirm your income, lenders typically require W-2s, tax returns from the past 2 years, current pay stubs and proof of other sources of income like alimony.
• Debt-to-income ratio (DTI): The lender will look at your DTI, which is a calculation of your total monthly debts divided by your monthly income. The DTI requirement varies by loan type, but your DTI should ideally be 43% or less.

2. Check Your Credit

Lenders and the mortgage investors they work with have minimum standards for your credit score, so it’s important to understand where you stand.

Because mortgage loan qualification is based on the median FICO^® Score, you should also know you can get credit reports from all three bureaus once a year from AnnualCreditReport.com. This will also alert you in advance if you have negative marks that could pose a challenge to work through.

By knowing your credit score, you can take steps toward building your credit if you don’t meet the credit score needed to buy a house. To build credit, you should make timely payments on all outstanding loan balances and pay off or pay down as much debt as possible. Your ability to qualify for various loan options is dependent on your DTI ratio, which compares your minimum monthly installment and revolving debt payments to your gross monthly income. You want to keep your DTI at 43% or less for the best chance of qualification.

3. Gather Necessary Documentation

The next step is to gather the necessary documentation needed for mortgage preapproval. In order to have a preapproval analyzed, you’ll need to provide the following:

• Income. Potential borrowers have the last two pay stubs, 2 years’ worth of W-2s and 2 years’ worth of tax returns. If you get a 1099, include those, too.
• Assets. You should be prepared to provide the last two monthly statements for any bank or investment accounts you plan to use for a down payment or to show reserves in the event of a loss of income.

If you’re self-employed, be sure to have 2 years’ worth of business tax returns available. Additionally, because of the changing business conditions after COVID-19, you may be asked to provide recent audited or unaudited profit and loss statements.

4. Shop Around With Different Lenders

When you’re applying for a mortgage loan, it won’t hurt to shop around and apply with multiple places. There are a couple of reasons for this: 

• Compare the financials. When shopping around and comparing rates, you’ll see two rates, with one being higher than the other. The lower rate (interest rate) is the one your monthly payment is based on. The second rate (APR) contemplates the base rate plus other costs like mortgage insurance and closing fees. The bigger the difference between the rates, the more you’re being charged in closing costs.
• Ask questions. It’s not just rates you should be worried about. Here are some questions to ask lenders: Do you charge fees for mail-in or phone payments? Will you service the loan after it closes, or will the servicing be sold? Will you proactively reach back out if there’s an opportunity to get into a lower rate? All of these things need to be considered.

5. Apply For Preapproval

Once you’ve chosen the right lender, it’s time to apply for a mortgage preapproval. Depending on the lender, you can fill out an application in person or online. You’ll need your required documentation on hand, such as W-2 statements, tax returns and pay stubs, so that your lender can confirm your financials. The lender will verify your income, assets and credit score to determine what loans you could be approved for, how much you can borrow and what your interest rate might be.

FAQs About Mortgage Preapprovals

Below are the most frequently asked questions about mortgage preapprovals.

How far in advance should I get approved for a mortgage?

Once you’ve made the decision that you’re ready to buy a home, you should feel free to get preapproved as soon as possible. Getting preapproved will give you time to figure out the top end of your budget and shows real estate agents that you’re serious about the financial commitment.

Will multiple preapprovals hurt my credit score?

When you make an inquiry for a loan or line of credit, lenders or creditors are required to submit a hard credit pull. This pulls down your credit score temporarily. FICO^® says the typical drop is less than 5 points.

How long does preapproval for a mortgage take?

How long a preapproval for a mortgage takes depends on the lender. In some cases, it could take minutes to get preapproved, while others may take hours or even days.

Is it common for a mortgage to be denied after preapproval?

While it’s not always common for a mortgage to be denied after preapproval, it doesn’t guarantee that you’ll be approved for a mortgage. A report from the Consumer Financial Protection Bureau shows that the overall denial rate for home purchase applications was 9.1% in 2022, higher than in 2021 (8.3%), but slightly lower than in 2020 (9.3%).

Does getting a preapproval for a mortgage cost money?

Getting a preapproval for a mortgage shouldn’t cost you any money. However, many lenders charge an application fee after you decide to proceed with the loan application.

What is a mortgage preapproval letter?

If a lender offers you a preapproval, they’ll issue you a preapproval letter. A good preapproval letter will contain several pieces of information, such as the amount of the preapproval, how long the letter is valid for, the loan option being used and whether income, assets and credit have been verified.

The Bottom Line

A mortgage preapproval lets you know how much you can afford to spend on a home by doing a credit check and verifying your income and asset documentation. This is distinguished from a prequalification, which involves verbal or written estimates of income and assets, and a final mortgage approval, which means you’re clear to close.

If you’re ready to move forward and see what you qualify for, start an application with Rocket Mortgage^®.