What Is Mortgage Preapproval?

Definition & Examples of Mortgage Preapproval

A couple celebrates a winning offer on a home.
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A mortgage preapproval is an official document that details how much a lender is willing to let you borrow. Some sellers require a mortgage preapproval before accepting your offer to buy a house.

When you’re hunting for a new home, a mortgage preapproval letter tells sellers you’re serious about buying—they may be more willing to negotiate with you if you have the letter in hand. The letter expedites the homeselling process—the sooner you can get approved for a mortgage, the faster the house gets sold.

What Is Mortgage Preapproval?

Your mortgage preapproval is a letter from a home-loan lender outlining the maximum mortgage amount the lender is willing to give you.

Some homeowners confuse preapproval and prequalification—it’s easy to do—but while those terms have some similarities, they have some key differences.

Preapproval is a thorough analysis of your credit history, income, and debt, whereas prequalification is more of a preliminary analysis of your finances based on the information you provide.

Prequalification doesn’t usually require a hard credit check and, since it uses details you provide instead of a credit bureau, it’s not an official document.

On the other hand, preapproval will give you an idea of how much house you can afford and potential lenders you can work with. Basically, it’s a more solid prediction of what your mortgage amount could be since it’s based on credit-bureau data.

How Does Mortgage Preapproval Work?

You get a preapproval letter by completing a loan application. Lenders will ask you for specific financial documents, like tax returns, pay stubs, and access to your bank and investment accounts.

All lenders have different processes and procedures, but most require you to sign off for a credit check and hand over other financial documents. Access to your credit history allows the lender to see what you can afford to borrow and reasonably pay back through monthly installments. Depending on how much work is involved with your documents, it could take several days to review your application.

Lenders may provide varying levels of preapprovals. For example, Quicken Loans has three tiers of preapprovals ranging from a simple preapproval to an in-depth approval that includes up to a 90-day rate guarantee.

If you qualify, you’ll get a preapproval letter. This letter is usually valid for a maximum of  90 days but different lenders have different limits for how long preapproval letters are valid.

Pros and Cons of Mortgage Preapproval

Pros
  • Expedites the homebuying process

  • You can shop around for low rates

What We Don't Like
  • Expires after a set amount of time

  • Won’t guarantee you a home loan

  • Dings your credit score

Pros Explained

  • Expedites the homebuying process: If sellers encounter people who like the home but aren’t necessarily ready to buy it, it means they’re going to keep it on the market (and possibly continue to make home payments on it themselves). The faster you can show you’re serious about buying the home with a mortgage preapproval, the faster the homebuying process will go. 
  • You can shop around for low rates: You don’t have to settle for a preapproval from the first lender you apply with. You can complete multiple applications with many lenders to see which ones will offer you the best interest rate and terms. Credit scoring models like FICO evaluate similar inquiries and can tell the difference when you’re rate shopping versus when you’re applying for a loan one time. If you apply for many different home loans within 30 days, it’ll count as one hard inquiry on your credit report rather than multiple, score-lowering inquiries.

Cons Explained

  • Expires after a set amount of time: Mortgage preapprovals don’t last forever. Different lenders have different expiration dates, sometimes running out within 30 days of approval. If you don’t find a home within 30 days, that could mean you’ll need to re-apply for a new preapproval letter and it’ll cause your credit score to take another temporary dip.
  • Won’t guarantee you a home loan: Mortgage preapprovals are not approvals. There’s still a chance that if your finances change after you get preapproved, you might not qualify for a home loan when you officially apply. 
  • Dings your credit score: Traditional mortgage preapprovals will request access to your credit score and history, which is a hard credit inquiry and temporarily causes your credit score to drop. While not permanent, it might affect borrowing rates and terms for other things in the immediate future, like a credit card or auto loan. You may want to wait a few months after buying a home before applying for other loans or credit.

Key Takeaways

  • A mortgage preapproval is essential to streamline the homebuying process. Without it, you might not land the home of your dreams.
  • You get a mortgage preapproval by completing a mortgage application. You’ll need to provide financial documents, like pay stubs, tax returns, bank statements, and assets. You’ll also need to hand over proof of identification—like a driver’s license—and approve a credit check.
  • You can strengthen your preapproval chances by cleaning up your credit score. Remove any inaccurate information that’s hurting your score and try to pay down your credit card debt.
  • Apply for a mortgage preapproval before you start looking at homes so you know how much home you can afford.

Article Sources

  1. Bank of America. "Mortgage Pre-Qualification vs. Pre-Approval." Accessed Sept. 9, 2020.

  2. myFICO. "How Do Credit Inquiries Affect Your FICO Score?" Accessed Sept. 9, 2020.