What Exactly Is Mortgage Preapproval?
It's an important step in the homebuying process. Here’s what to expect
A mortgage preapproval is when a mortgage lender evaluates your eligibility for a mortgage loan, as well as how much money you may be able to borrow and at what interest rate. To do this, they evaluate your credit, verify your income, and assess your full financial scenario.
How Mortgage Preapproval Works
To get a preapproval, you’ll need to fill out an application, submit various financial documents and statements, and agree to a credit check. The mortgage lender you’ve chosen will then look at your credit score, evaluate your income, assets, and debts, and consider these details in light of various loan program requirements.
A preapproval is different from a prequalification. Prequalification is less in-depth and does not require verification of your financial details or a credit check. A preapproval can more accurately determine whether you’re eligible to receive the loan you want.
How to Get Preapproved
The exact process varies by mortgage lender, but it generally involves an online or over-the-phone application, a credit check, and various forms of documentation. You’ll usually need to provide your most recent pay stubs, the last two months of bank statements, and copies of your recent W-2 forms and tax returns. You will also need to provide details on your down payment (the amount and source of it).
Once the lender has evaluated your finances, they’ll give you what’s called a “preapproval letter,” which details your loan product, likely loan amount, potential interest rate, and other details. This preapproval letter is usually good for about 90 days. After that, the lender may need to check your credit again.
The Benefits of Mortgage Preapproval
There are many benefits to getting preapproved for your mortgage. First and foremost, it helps you determine the correct price range for home shopping.
Keep in mind that you don’t have to take the full loan that you’re approved for. In many cases, you will qualify for more money than you’d prefer to spend on a monthly basis. A mortgage calculator can help you determine a comfortable price range and monthly payment for your household.
Preapproval also may make it easier to get a real estate agent. Since agents don’t get paid until the purchase transaction is complete, they want a guarantee that their clients can afford the home and that they’re serious about the purchase. Many agents will only work with buyers who have a preapproval letter in hand.
Similarly, mortgage preapproval can also help you stand out with sellers. It shows you’re committed to purchasing the home and that you have sufficient financial resources. In a bidding war, it could be what sets you apart from the competition.
Mortgage preapproval may also make your mortgage process go faster. Since the lender will have already collected verification and documentation of your financial details, there won’t be as much work required after you’ve found a home. Depending on the lender, it could shave days off your closing timeline.
Benefits of Mortgage Preapproval
- Helps you determine an appropriate price range for home shopping
- Makes it easier to get a real estate agent
- Gives sellers confidence in your offers
- May help you complete the mortgage and homebuying process faster
Improving Your Odds of Preapproval
If you want to increase your chances of getting preapproved for a mortgage, improving your credit can help. Additionally, paying your bills on time, reporting any errors on your credit report, and paying down debt can all move the needle in the right direction.
If you’re renting, ask your landlord to report your rent payments to credit bureaus each month, since timely rent payments can also boost your score. If your landlord can’t help, tools like RentReporters and Rental Kharma can help you do it independently.
Keeping your income consistent—or even increasing it—can also help your chances. So make sure your employment is stable or consider taking on a side gig to supplement your wages while you hunt for a home.
The Bottom Line
Mortgage preapproval is an important step in the homebuying process. Though every mortgage lender’s process varies slightly, you can help streamline your application by gathering your financial documents early, using a mortgage calculator to understand your perfect price range, and keeping tabs on credit and finances well before you start shopping for a home.