According to Redfin, median monthly mortgage payments hit an all-time high of $2,632. To tackle these expensive loans, you must plan your home-buying costs well in advance. And mortgage preapproval is the way to do that.
A mortgage pre-approval helps you estimate your loan budget and monthly payments. It also alerts you about potential loan issues you may face.
A pre-approval can give you an edge in 2024’s market, where new listings are decreasing YoY. It can portray you as a serious buyer working with the lender to finance your purchase.
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Preapprovals are Key 🔑
- 86% of home sellers prefer buyers who are pre-approved for a mortgage.
- Most listing agents require you to submit a pre-approval with your offer. They want and need to know that you are serious and qualitifed to buy the house they’ve listed.
- A pre-approval will typically take less than 24 hours. And getting pre-approved will not harm your credit score. This is because most lenders use “soft” credit pulls which do not register as inquiries on your credit report.
- 72% of homebuyers do not shop around for their mortgage. They close their loan with the lender who pre-approved them.
What Is a Mortgage Preapproval?
Mortgage pre-approval is the initial evaluation of your finances to determine the loan amount you can get. Remember, it doesn’t guarantee the actual loan.
During preapproval, a loan officer reviews your finances, such as income, DTI, credit history, etc., to determine:
- The loan amount you qualify for
- The interest rate
- The monthly mortgage payment
After a lender pre-approves your mortgage, you get a pre-approval letter, which you can use to make offers. This letter shows sellers you have a lender to finance your purchase and are serious about home buying.
Preapproval vs. Prequalification
Preapproval and prequalification are often used interchangeably, but they have different verification requirements.
Prequalification is a cursory review of your finances without a comprehensive document review or credit checks. It is based on factors such as your credit score, down payment, monthly debt, and loan structure.
Whereas, a mortgage preapproval involves a more thorough review of documents and your credit score. To obtain preapproval for a mortgage, you need to provide documents such as:
- Proof of financial history
- W-2s
- A mortgage statement (if you already own a home)
Preapproval vs. Approval
Mortgage pre-approval is the process to determine the loan amount you qualify for. A lender preapproves a mortgage based on your financial history and credit scores.
Home loan approval, on the other hand, involves a thorough assessment of the property you want to buy. The lender verifies home appraisal, home inspection, title, and survey documents before the approval.
In short, preapproval for a home loan is the lender’s promise to grant the loan, and approval is the actual issuing of the loan.
Does Getting Preapproved Hurt Your Credit Score?
Yes, mortgage preapproval temporarily lowers your credit score.
During the preapproval, you allow the lender to access your credit report. The lenders review the report via one of the three credit bureaus – Experian, TransUnion, or Equifax. Lenders obtain a score based on these credit reports.
The credit score examination falls under a “hard inquiry,” which indicates acquiring new debt. This causes a temporary dip in your credit score. However, the impact of a hard inquiry decreases with time, and it is completely dropped off after two years.
How to Get Preapproved for a Mortgage?
The home loan preapproval process consists of six steps.
Step 1: Check Your Credit Score
Credit score impacts the preapproval mortgage process to a significant extent. Different mortgages have different credit score requirements.
| Loan Type | Cut Off Credit Score |
| Conventional Mortgage | 620 |
| FHA | 580 |
| USDA | 640 |
The common credit scoring model FICO (Fair Isaac Corporation) score for most lenders is 620.
A credit score of 740 is ideal for the lowest rate. At a high-interest rate, even a score of 500 can help you get a preapproved home loan.
Step 2: Know Which Mortgage Program to Pick
Here’s a quick mortgage preapproval checklist for each home loan type:
- Conventional Mortgage Preapproval: A conventional mortgage is a home loan not backed by a government agency. You can get a conventional loan from private mortgage lenders. It is subject to their guidelines, down payment requirements, credit score criteria, and interest rates.
- FHA Mortgage Preapproval: The Federal Housing Administration gives FHA loans to borrowers with lower credit scores and higher debt-to-income ratios. Remember, low credit scores = higher interest rates.
- VA Mortgage Preapproval: The United States Department of Veterans Affairs offers VA loans to veterans. With no down payment and lenient credit requirements, you can even get a VA loan with bad credit.
- USDA Mortgage Preapproval: Low to moderate-income home buyers in rural areas can apply for USDA loans. They offer zero down payment loans but you need to cover the USDA closing costs of 2% to 6%.
Step 3: Collect Documents Needed for Mortgage Preapproval
The documents to get a preapproval mortgage are:
- Proof of Income
- Employment Verification
- Credit History
- Proof of Assets
- Personal Identification
- Debt-to-income Ratio (DTI)
- W-2 Statements
- Pay Stubs
- Bank Statements
- Driver’s License
- Social Security Number
Self-employed borrowers who own 25% or more of their business, need to submit tax returns for the past two years. The lender may also request profit/loss statements and letters from the CPA explaining the income.
Mortgage lenders will give you a loan estimate after submitting the documents. It will include information like the status of your preapproval and the amount you have qualified for.
Step 4: Compare Lenders
Research mortgage lenders and their interest rates. Compare them based on the loan amount you need to borrow, their guidelines, loan offers, and mortgage policies.
If you choose a lower Annual Percentage Rate (APR) you can save more in the long term. Borrowers across the nation have saved over $84,000 over the term of their loans this way.
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Step 5: Fill Out the Application Form
The lender will require you to fill out your personal details and mention the purpose of borrowing the loan.
Application forms typically have a standard format and rarely vary across lenders. After submitting the application you need to furnish the required documents.
Step 6: Get the Preapproval Letter
The loan officer issues a preapproval mortgage letter if you meet the criteria set by the lender.
After you receive the letter, keep the copies of that handy when you make offers on properties. A preapproval mortgage letter will keep you ahead of the competition in a seller’s market.
»Also Read: What Is a Mortgage Commitment Letter
Can I Get Preapproved for a Mortgage Online?
Yes, you can. Here are 3 simple steps to get online mortgage preapproval:
- Apply for the Pre-approval on the Lender’s Website: Fill out the necessary income and debt information without uploading any documents. Some lenders sync the borrower’s application with the bank accounts to simplify the further process.
- Decide the Type of Loan: Evaluate your current financial situation for better payback options. Compare various mortgage types based on your credit score, monthly payment budget, down payment budget, etc.
- Get the Preapproval Letter: After verifying all your finances, the bank issues the preapproval letter for the mortgage.
Factors Affecting Home Loan Preapproval
The following factors impact a preliminary mortgage approval:
- Credit Score: The credit score determines the interest rate you’ll be paying for your mortgage. An ideal credit score of 740 can get you the lowest interest rates. You can also qualify with a lower credit score but at a higher interest rate.
- Debt to Income Ratio: DTI ratios should be at most 43% when dividing total debt by pretax income. However high credit scores or extra mortgage reserves may allow a DTI ratio of up to 50%.
- Down Payments and Closing Costs: Your expenditure on a downpayment depends on the type of loan you opt for. An average home buyer pays a 20% down payment. However, with a Freddie Mac and Fannie Mae backed conforming mortgage, your downpayment expenses can be as low as 3%. You’ll have to spare an additional 2% to 4% to pay the typical closing costs.
- Employment Stability: Mortgage lenders perform an employment stability check. They verify the borrower’s last 2 years of employment history, full-time salary, or other hourly earnings.
- Mortgage Reserves: You should ideally have several months’ worth of mortgage payments in the bank. Lenders only often approve a low credit score or high DTI-ratio applicant.
Bottom Line
Mortgage preapproval is the first step in securing a mortgage. It gives you a clear picture of how much home you can afford.
At the end of the preliminary mortgage approval process, you get a pre-approval letter. This letter shows you as a serious buyer and helps you negotiate better in a competitive market.
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Frequently Asked Questions
1. How long does mortgage pre-approval take?
A mortgage pre-approval can take a few hours or a few days. It depends on the lender, your finances, and the availability of the documents such as employment details and pay slips.
2. How long is a preapproval for a mortgage good for?
Generally, a pre-approval mortgage lasts for 90 days. If you can't find a house in this span, you can request your lender to renew the pre-approval.
» How Long Does a PreApproval for a Mortgage Last? Learn in-depth about the mortgage preapproval timeline.
3. When to get preapproved for a mortgage?
The best time to get pre-approved for a mortgage is within the next two months of making an offer.
4. Should I get preapproved for a mortgage by multiple lenders?
We recommend you get preapproved by 3 to 4 mortgage lenders. A Freddie Mac research suggests buyers can save $600 to $1,200 per year by mortgage shopping when interest rates are high.
5. Will getting preapproved by multiple lenders hurt my credit score?
No, it won’t hurt your credit score significantly if the mortgage applications are filed within 45 days. Inquiries that result from opening multiple new credit lines in a short period can affect your credit score.
» How to Repair Your Credit Score: Learn ways to repair your credit score after getting preapproved for a mortgage by multiple lenders.
6. What if my mortgage preapproval gets denied?
In case you don't qualify for a mortgage preapproval, the primary step is to know what turned down the application. You can take necessary steps based on whether the cause is a higher DTI ratio or lower credit scores.
7. What do you need to get pre-approved for a mortgage?
You will need thorough financial statements and other documents for verification. The earlier you have these prepared the better chances you have of a quick preapproval process.
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