Buying a home can be a fulfilling yet frustrating experience. There’s a whole lot more involved than looking at well-staged photos online for hours at a time and then landing the home of your dreams.
One of the most important but overlooked to-dos of homebuying is demonstrating to potential lenders that you’re a creditworthy borrower. One of the best ways to do this is by getting a mortgage preapproval. Here, we’ll break down the preapproval process and explain what you can generally expect.
What is mortgage preapproval?
A mortgage preapproval is a conditional green light from a mortgage lender that you’re eligible to borrow a certain amount of money for a home purchase. Lenders share this information in writing, so you’ll often hear this referred to as a “preapproval letter.”
A mortgage preapproval is different from a mortgage prequalification, though the terms are sometimes used interchangeably. A prequalification provides a rough estimate of how much you might qualify for and comes from a surface-level review of your financial information.
A preapproval is more involved and gives you a more accurate idea of what a lender will offer in terms of a loan amount and interest rate. It also illustrates to home sellers that you’re a legitimate buyer — giving you a leg up in the bidding process.
How to qualify for a mortgage
In order to get preapproved for a mortgage, you first must qualify for one. Potential borrowers interested in a conventional mortgage are generally expected to meet the following requirements:
- Provide at least a 3% down payment. The loan-to-value ratio — which is a calculation of the mortgage amount divided by the home’s price tag — can’t exceed 97%.
- Have a minimum credit score of 620. Keep in mind that if your score is on the lower end, you’ll be required to provide a higher down payment at closing.
- Have a maximum 45% debt-to-income ratio. There’s a threshold on how much of your gross monthly income can go to debt payments to qualify for a mortgage. In some cases, that ratio is capped at 36%, but the overall maximum across mortgage products is generally 45%.
- Prepare to pay private mortgage insurance. If you put down less than 20% of the purchase price, you’ll pay PMI monthly. This is in addition to your mortgage payment.
There are also employment and income documentation requirements.
Government programs offer slightly more lenient guidelines for certain borrowers. FHA loans are available to people with credit scores as low as 580, and VA loans offer zero-down payment loans to military members and veterans.
The Home Possible® and HomeReady® homebuying programs offered by government-sponsored enterprises Freddie Mac and Fannie Mae also help low- to moderate-income borrowers looking for a conventional loan. It’s important to note that Fannie and Freddie don’t lend directly to borrowers; you’ll need to work with an approved lender to apply for a loan.
How to get preapproved for a mortgage
If you’re confident that you qualify for a mortgage, you can move on to getting preapproved. Here’s a rundown of what you need to know.
When to get preapproved for a mortgage
The best time to seek a mortgage preapproval is when you think you’re ready to buy a house, but before you start spending tons of time house hunting. That’s because it’s not worth falling in love with a home that’s outside the price range you can realistically afford.
Depending on the lender’s process and how quickly you submit the requested documents, a mortgage preapproval can be issued in as little as 24 hours.
Where to get preapproved for a mortgage
There are several types of financial institutions that offer mortgage preapprovals:
- Credit unions
- Mortgage brokers
- Mortgage lenders
Depending on the institution, you may be able to submit your documents electronically for a mortgage preapproval. Check with individual lenders to learn more about their process.
It works in your favor to get multiple mortgage preapprovals — at least two or three. Before you commit to one lender, you want to be sure you’re getting the best available terms for your financial situation. According to LendingTree, which owns MagnifyMoney, homebuyers stand to save more than $27,000 in interest over the life of a $300,000 loan by comparison shopping for the best mortgage interest rates.
One thing to keep in mind about shopping around is that you want to keep it to a short window, typically 14 days. Each preapproval involves a hard inquiry on your credit report, and you’ll want to minimize the impact those inquiries have on your credit score. Getting your shopping done within two weeks means that a few inquiries will just count as one, according to FICO.
What you need to get preapproved
Lenders will request several documents and types of information from you for a mortgage preapproval. Those items typically include:
- Government-issued photo ID, like a driver’s license
- Social Security number
- 2 months of bank statements
- 1 month of pay stubs
- 2 years of W-2 or 1099 tax forms
- Credit reports and scores from all three bureaus
This information helps lenders determine your debt-to-income ratio, creditworthiness and ability to repay if they lend you money.
Advantages of getting preapproved for a mortgage
A mortgage preapproval is close to a must-have for potential homebuyers. Here are some reasons why it’s an important step in the homebuying process.
- You get a solid idea of the loan you’d qualify for, which makes it easier to determine how much house you can afford.
- Home sellers will take you more seriously as a potential buyer and will be more comfortable accepting your offer.
- Lenders are giving you a vote of confidence that you’re more than likely eligible to borrow money from them.
- You’re given an opportunity to compare interest rates before committing to a specific lender.
- You’re presented with a picture of where you stand financially and what short-term improvements to your credit you can make before closing, such as paying down more of your debt.
Things to watch for when getting preapproved for a mortgage
There are some caveats to mortgage preapproval, however.
- A preapproval is not a guarantee that you’ll get a loan from the lender that issued it. Getting preapproved is conditional.
- There should not be major changes to your financial situation between the time you’re preapproved and when you decide to move forward with a particular lender. Don’t apply for new credit such as an auto loan or credit card, change jobs or take any other action that would affect your eligibility.
- Preapprovals aren’t indefinite — they often last for about 90 days. You’ll have to go through the process again if you haven’t closed on your home by the time your preapproval expires.
What happens after preapproval?
Once you have your home picked out, then it’s time to complete a full mortgage application.
After you submit your mortgage application, the lender has three days to provide you with a Loan Estimate, which tells you the estimated loan amount, interest rate, closing costs, monthly payment and taxes for your mortgage, among other important details. .
You’ll want to submit mortgage applications for at least two or three lenders and compare the Loan Estimate document you receive from each. Pay attention to all the estimated costs and fees associated with the mortgage transaction to make sure you choose the best deal.
When you’ve made a choice, you’ll need to express your “intent to proceed” with your chosen lender. Notify the lender within 10 business days of receiving your Loan Estimate, according to the Consumer Financial Protection Bureau. You would then provide the lender with additional documentation related to your credit, income, proof of down payment funds and whatever else they require. After that, your loan goes through the underwriting process. You’ll get the property appraised and inspected during this period, as well.
If all goes well and you’re granted full approval, then you’re ultimately scheduled for a final walk-through and closing.
The bottom line
Getting a mortgage preapproval is a crucial step in the homebuying process, but it doesn’t mean you’re in the clear to borrow from a lender just yet. Having a preapproval letter does give you a leg up over the competition, however.
Be sure you’re in the best financial shape possible before you reach out to lenders to begin the preapproval process. Pay down your outstanding debt, clean up any blemishes or errors on your credit report and find ways to increase your available down payment.