Basics of Loan Preapproval
Should You Get Preapproved?
Experts suggest that you get preapproved for a loan before making a purchase. But what does that mean, and why is it important?
What it Means to Get Preapproved
When you get preapproved, you submit a preliminary application to a lender. They review your credit, along with other items, and let you know what type of loan they’re willing to make. Getting preapproved helps you find out how much a lender will give you, at what rate, and what the terms look like. It’s a way to find out -- before the last minute -- whether or not you’ll get the loan you need.
You do not necessarily have to borrow money when you get preapproved. You’re just getting information and bargaining power. If you get a better offer from another lender, you can take it. Likewise, the lender may not actually make a loan you’re preapproved for. If you and the lender have been thorough in the preapproval process, there shouldn’t be any problem. However, in some cases the loan only happens if certain criteria are met, such as:
Why Get Preapproved?
When you work with a lender, you find out exactly how much they’d be willing to lend. They can run some numbers for you and help you figure out exactly how much you can borrow. You can also run numbers yourself using online calculators, but it never hurts to get preapproved and have a lender go over everything -- they may see something that you didn’t. They know their policies, and other lenders are likely to have similar policies.
When you know how much you can borrow, you narrow down the universe of possibilities so that you only shop for what you can actually afford. You’ll avoid falling in love with something that may be out of reach financially (and that may tempt you to stretch more than you should).
Getting preapproved also allows you to shop like a cash buyer. You don’t need to line up financing at an auto dealer or tell a home seller that you haven’t yet talked to a lender. You and the seller can be reasonably confident that the money will be there if you decide to buy.
You can also understand the costs when you get preapproved. Lenders (whether it’s a credit union, auto dealer, traditional bank, or online lender) often quote attractive rates in advertisements. However, you may or may not qualify for those rates. When you get preapproved, lenders review your credit, income, and assets. They may also ask about the property you’re going to buy (a new or used car, a single-family home or a condo, etc). With that information, they can provide a quote that’s more customized to you and your situation.
If You Come Up Short
What if you get preapproved and you cannot borrow as much as you’d like? You should start with the unpleasant task of considering whether or not to lower your expectations. If you find that you really need to borrow more, you have several options:
- Increase the income lenders consider by applying for the loan jointly (with a spouse, for example)
- Make a larger down payment (which reduces the amount of your loan)
- Offer more collateral to the lender (if they’ll allow this)
- Use a co-signer
- Use a longer term loan (but beware of getting upside-down)
- Work on building your credit to be more attractive as a borrower