How to Get a Mortgage Preapproval

Why This Letter from Lenders Matters to the Homebuying Process

Interest only mortgage
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Once you’ve decided that renting is no longer desirable for your living situation and you’re ready to become a homeowner, there’s a lengthy list of steps you must take to reach your goal of homeownership. 

You’ll most certainly want to whip your financial profile in shape in order to prove to potential mortgage lenders that you’re a creditworthy borrower. Once you’ve put in considerable effort to improve your favorability in the eyes of lenders, it’s time to get a mortgage preapproval. 

What exactly is a mortgage preapproval?

A mortgage preapproval is a green light from a lender that you're able to qualify for a general home loan amount—as long as certain conditions are met. A preapproval also outlines your hypothetical mortgage interest rate, as well as any homebuying programs you could be eligible for. Mortgage preapprovals are usually valid for 60 to 90 days. 

To receive a mortgage preapproval you first have to apply for a home loan with a mortgage lender. The application requires an extensive amount of information to help the lender determine whether you're really financially able to borrow money to buy a home. 

Lenders typically collect the following items during the preapproval process: 

  • Your credit reports and scores. 
  • Recent pay stubs. 
  • Recent bank statements. 
  • Recent retirement account statements. 
  • Tax returns from the last two years. 
  • W-2s from the last two years. 

You'd likely also be required to show proof that you have funds to cover your down payment. 

While a mortgage preapproval isn't a guarantee that you'll be granted a loan from that lender, it gives you a more accurate idea of your house budget and puts you in a better position with home sellers. 

What are the requirements for preapproval? 

Every lender will have their own stipulations for what makes a borrower meet the criteria for a mortgage preapproval, though there are some common thresholds. 

For example, if you're aiming to borrow a loan backed by the Federal Housing Administration, you'll typically need a credit score of at least 580. For conventional loans and loans backed by the Department of Veterans Affairs, you'll need a 620 credit score or higher. Still, you should aim for a credit score upwards of 700 to put you in a position to receive better-than-average mortgage terms, and at least 740 if you want the best terms. 

Another quality lenders look for in borrowers is an acceptable debt-to-income ratio. If your DTI ratio is higher than 43 percent, you'll have trouble being preapproved for a mortgage. That's because lenders assume if your ratio exceeds that threshold, you'll struggle to make mortgage payments every month, according to the Consumer Financial Protection Bureau. A good rule of thumb for homebuyers is to keep their DTI at 36 percent or lower. 

Lenders also take into account how much you're willing to put down against the estimated loan amount. If you're only planning to put down the bare minimum of 3.5 percent, that could impose even more of a limit on how much house you're ultimately able to afford. On the other hand, if you're able to show that you can bring a larger down payment to the closing table—shrinking your anticipated loan-to-value ratio—you might have a better chance at qualifying for a larger mortgage amount. 

If you're preapproved for a mortgage, it's important that you don't make any drastic changes to your finances in the interim. Applying for new credit, racking up tons of extra debt or changing jobs could ruin your chances at homeownership. 

Finding a mortgage lender 

One of the most efficient ways to find a mortgage lender is to ask for recommendations from family, friends and colleagues. Be sure to get well-rounded opinions about their experiences before moving forward with any particular lenders. 

You could also tap a reputable resource online to find lenders based on trusted reviews, or work directly with a mortgage broker that can gather mortgage quotes on your behalf. 

Once you've narrowed your list and have two or three lenders that sound promising, be sure to get mortgage quotes from each entity. You'll receive a Loan Estimate after applying for a mortgage, which allows you to compare the terms and determine which lender would work best for your financial situation.