Preapproval is the first step to buying a house
When you’re ready to get serious about buying a house, the first step is to get preapproved for a mortgage. Preapproval shows you your home buying budget, interest rate, and future mortgage payment. And it tells real estate agents and Realtors you’re a serious buyer.
In today’s housing market, it’s crucial to get preapproved before you try to make an offer on a home or even start house hunting. Here’s how to get preapproved for a mortgage in just a few steps.
In this article (Skip to…)
- What is preapproval?
- How to get preapproved
- When to get preapproved
- Preapproval vs prequalification
- Denial after pre-approval
- Common mistakes
- Preapproval FAQ
- Begin your preapproval
What is mortgage preapproval?
Mortgage preapproval is the first stage in the home loan process. You’ll fill out a short application to make sure you’re eligible to buy a house. Preapproval is important because it shows a lender will approve you for financing — meaning home sellers can trust your offer. It also shows the maximum loan amount for which you’re likely to be approved.
In addition to establishing your home buying budget, your preapproval shows the specific interest rate and loan terms you can expect.
To get preapproved, lenders assess your full financial situation, including your credit and income. That means you’ll have to provide financial documents like bank statements and tax forms verifying your cash flow. Once approved, the lender will issue a preapproval letter that shows home sellers and real estate agents you’re a qualified buyer.
How to get preapproved for a mortgage
The preapproval process varies a little from lender to lender. But it generally involves a short loan application, a credit check, and various forms of documentation. Many mortgage lenders let you complete the whole preapproval process online. But if you want, you could also do it over the phone or in person.
Step 1: Gather your documents
Your lender will require documentation to support the information in your loan application. This is what makes getting preapproved different from getting prequalified. Typically, your lender will require the following documents for mortgage preapproval:
- Identifying documents such as a valid driver’s license or photo ID
- Last two years’ W-2s and/or 1099s
- Last two years’ tax returns
- Profit & Loss statement if self-employed
- Pay stubs for the last 30 days, if applicable
- Statements from bank accounts, retirement accounts, and other asset accounts from the most recent two months
- Divorce decree or separation agreement, if applicable
- Contact information for your landlord(s) for the last two years, if you’re a first-time home buyer. If you are currently a homeowner, your housing payment history will show up on your credit report
To speed up the preapproval process, it helps to have these documents in hand before you get started. Some lenders can pull documents directly from your employer and bank, but not all. Some can also verify your income with the IRS, with your consent.
Step 2: Complete a preapproval application
To get preapproved, you need to fill out a mortgage loan application. Most lenders let you complete the app online, over the phone, or in person. Online applications typically take 10-20 minutes to complete. The loan application, also known as Form 1003, asks for your personal information, Social Security number, financial information, and loan details.
After your application is completed, the lender will pull a three-bureau credit report known as a tri-merge. This report shows your credit scores and credit history from the major credit-reporting agencies: TransUnion, Equifax, and Experian.
Note, you can apply and get preapproved with any lender you wish. You can even get preapproved by more than one lender to find the best offer. Preapprovals are non-binding, and you’re free to switch lenders before taking out the loan.
Step 3: Wait for you lender to process the preapproval
Once you’ve filled out a preapproval application, turned in documents, and paid the application fee (if applicable), your work is done. The last step, underwriting, is up to your lender. It will verify your financials and check your credit to make sure you can afford the home you want to buy.
Most lenders use a universal automated underwriting system (AUS) to preapprove borrowers for home loans. This digital system lets lenders process preapprovals more quickly, so you don’t have to wait for a human underwriter to read through all those documents and approve or deny you.
By using automated underwriting, lenders can render near-instant preapproval decisions; some will preapprove you in as little as a few hours or within a day.
If approved, your lender will issue you a Loan Estimate within three business days. It will tell you whether you are preapproved and for how much. The document should also outline the type of mortgage, estimated interest rate, and estimated closing costs.
When to get preapproved for a mortgage
The ideal time to get preapproved is before you begin house hunting. The preapproval will tell you how much home you can truly afford, so you know you’re shopping in your price range. Plus, you need a preapproval letter in hand to make a serious offer on a house. So getting it done early on helps you move quickly when you’re ready to buy.
Your mortgage preapproval is typically good for 30 to 90 days; check with your loan officer for specific details. You’ll likely have the option to update and extend your preapproval letter if your home search takes longer than expected.
“Some lenders will go a step further and can even get you fully underwritten at this time,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. In this case, he says, “your letter is what we call an ‘advanced approval,’ where your offer needs no financing contingency.”
Preapproval vs. prequalification
Preapproval is different from mortgage prequalification. A preapproval letter gives you verified home buying power, whereas a prequalification letter estimates your home buying budget without verifying your eligibility. While you can get prequalified faster than you can get preapproved — because no documents are required — your estimated budget and rate might not be as accurate. And a prequalification letter won’t help you make an offer on a house.
While both processes help buyers understand how much house they can afford, prequalification is generally less desirable because it doesn’t verify income or pull FICO scores from the major credit bureaus. It simply relies on self-reported information. This results in fewer assurances that a buyer is qualified.
On the other hand, mortgage preapproval involves a more thorough verification of your finances. It shows that a buyer has taken the time to determine their loan eligibility, and that they are prepared to move forward quickly should a home seller accept their offer.
Can you get denied for a mortgage after being preapproved?
Yes, you can get denied for a mortgage loan even after being preapproved for it. There are a number of reasons this could happen. For example:
- After preapproval, new negative information could appear in your credit history, dropping your score below the lender’s qualification guidelines
- If you lost your job prior to closing on the loan, you’d likely be denied. That’s because the lender can no longer verify you’ll be able to make your monthly payments
- Running up too much credit card debt before the loan closes could put your approval in jeopardy, too
Basically, anything that significantly impacts your financial picture between your preapproval and loan closing could change your mortgage eligibility.
Also, keep in mind that a preapproval typically happens prior to beginning your home search. As such, your new home must also be approved by the lender. For example, the loan amount can’t exceed the home’s appraised value. In addition, if you’re getting an FHA loan or a VA loan, the new home must meet government safety standards. The presence of lead paint in an older home, for example, could derail the home-buying journey.
Common mistakes during the preapproval process
Any changes to your mortgage application after getting preapproved could affect your eligibility, interest rate, or home buying budget. After getting preapproved for a mortgage, try to maintain the status quo until you close on the home. For example:
- Keep the same job
- Delay major purchases that could impact your credit or debt-to-income ratio
- Protect your savings account
- Gather documentation for any large deposits into your bank accounts
If you do have any major changes in any of these areas, be sure to contact your lender as soon as possible. Otherwise, by holding steady, you should be able to keep your mortgage preapproval intact and your home offer secure.
Mortgage preapproval FAQ
Most mortgage preapprovals require a hard pull on your credit, which can affect your credit score. But the impact is usually very small. According to myFICO, one hard inquiry will take less than five points off your FICO score. (For perspective, the full scoring range is 300-850.) And if you get multiple pre-approvals within 2-4 weeks of one another, they all count as a single hard inquiry — so your score will only be dinged once.
Mortgage preapproval letters are typically valid for anywhere from 30 to 90 days. However, a preapproval can be updated and extended if the lender re-checks your information. The preapproval letter serves as evidence that a lender has reviewed your credit and verified your income and assets.
Getting preapproved is similar to getting prequalified, except a preapproval requires all the information you provide to be documented. For preapproval, you typically have to complete a full mortgage application where your credit history, employment history, and monthly income will be examined. You will supply the lender with financial documentation like bank statements, pay stubs, tax returns, and W2s.
Preapproval is free with many lenders. However, some charge an application fee, with average fees ranging from $300-$400. These fees may be credited back toward your closing costs if you move forward with that lender. However, since preapproval does not tie you to a lender, we’d recommend starting out with one that offers a free preapproval. You can always choose a new lender later on if you find a lower mortgage rate.
The timeframe for getting preapproved varies by lender. Most lenders take one to three days. Banks and credit unions may take up to 30 days. For the fastest preapproval, look for a lender that specializes in digital loan applications.
You should get preapproved before you start house hunting; the earlier, the better. Many lenders recommend getting preapproved 3-6 months before you plan to buy a home. If you foresee roadblocks for your loan (like having to improve your credit score or pay off debts), you may want to get your first preapproval up to a year prior to your home purchase. That should give you enough time to clean up your credit report and increase your down payment.
Preapproval letters vary from lender to lender. They typically include the purchase price, loan program, interest rate, origination fees, loan amount, down payment amount, expiration date, and the property address. The letter is typically submitted with your offer to buy a new home.
If you need to switch loan programs after getting preapproved — from a conventional to an FHA loan, for example — you’ll likely need to start the preapproval process all over again with a new loan application. Doing this would likely delay your closing and change the interest rate and terms of your loan.
A seller’s real estate agent may not want to show a home unless you have a preapproval letter. Your own agent would likely show the property; however, most real estate agents prefer working with home buyers who have been preapproved. The preapproval letter proves you’re a serious buyer and borrower.
Yes. Mortgage underwriting depends, in part, on your other monthly debts as measured by your debt-to-income ratio. Credit cards, auto loans, student loans, and other personal loans will factor into your DTI. If your ratio is too high, lenders may not be able to approve you. After getting preapproved, avoid applying for other loans or increasing your credit card balances before the home closes.
Start the preapproval process
If you’re ready to start house hunting — or even considering it in the near future — it’s time to start the mortgage process by getting preapproved for a home loan. The approval process will help lock in your borrowing power and give you an advantage in a competitive housing market. It’ll also turn up relevant issues, like a low credit score, that you might fix before beginning your homeownership journey.