Mortgage preapproval for a home loan shows sellers you are a serious buyer and won’t waste their time. It makes your offer more attractive in a competitive market. Additionally, a pre-approval mortgage helps you understand how much money you can borrow and alerts you about the problems you might face in getting a loan.
Key Takeaways
- Why Get a Mortgage Preapproved: A pre-approval letter makes your offer attractive to home sellers and real estate agents.
- Mortgage Preapproval Hurts Your Credit Score: The credit score examination falls under hard inquiry, which causes a temporary dip in your credit score.
- Factors that Affect the Preapproval Process: The type of mortgage, financial history, and lender’s policies influence the preapproval process.
What is a Mortgage Preapproval?
A mortgage preapproval is finding out how much money you can borrow to purchase a home. Getting pre-approved for a home loan doesn’t guarantee money.
It simply means a mortgage officer has glanced through your finances and determined:
- How much money you can borrow
- Rate of interest
- Monthly mortgage payment
After you complete the preapproval process, the lender issues a pre-approval letter. This letter makes your offer attractive to home sellers. A mortgage preapproval letter signifies you are working with a lender and you are a serious buyer.
Prequalification vs. Preapproval
Prequalification and preapproval are often used interchangeably, but they have varying verification requirements.
A pre-qualification mortgage only requires an initial review of your finances. The mortgage lender skips the comprehensive documents’ review and credit checks. It is based on your credit score, property purchase price, down payment, monthly debt, and loan structure.
Preapproval mortgage consists of a more thorough review of documents and your credit score. You need to furnish the following documents for mortgage preapproval:
- Proof of your financial history
- W-2s form
- A copy of your mortgage statement (if you already own a home)
Preapproval vs. Approval
The main difference between preapproval and approval is the level of verification process they require.
A pre-approval is based only on a cursory review of your finances and is not binding. Whereas, mortgage approval involves a thorough review of your documents, financial statements, and more. It is the process of obtaining a specific amount for the property you want to purchase.
For mortgage approval, your lender will need property details. They will get the property appraised to ensure they are not overpaying. Additionally, you need to submit the home inspection and title report.
Does Getting Preapproved for a Mortgage Hurt Credit?
A mortgage preapproval causes a temporary dip in your credit scores.
During mortgage 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 credit score based on the credit reports.
The credit score examination falls under “hard inquiry” and is visible on your credit report. Hard inquiries indicate acquiring new debt, which causes a dip in your credit score.
However, a hard inquiry’s impact on the credit score decreases with time and it is dropped off completely after two years.
How to Get Preapproved for a Mortgage?
The preapproval home loan process consists of six steps. They are as follows:
Step 1: Check Your Credit Score
Credit score impacts the preapproval mortgage process to a significant extent. Different mortgages have different credit score requirements.
A credit score of 740 is ideal for the lowest rate. At a high-interest rate, even a score of 500 can help in getting preapproved for a mortgage.
Step 2: Know Which Mortgage Program to Pick
Here’s a quick mortgage preapproval checklist for each mortgage type:
- Conventional Mortgage Preapproval: A conventional loan is a mortgage 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: Federal Housing Administration grants FHA loans to borrowers having lower credit scores and higher DTI ratios. Remember, low credit scores = higher interest rates.
- VA Mortgage Preapproval: 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 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
It would help you finalize a lender if you researched multiple mortgage lenders and their interest rates. Compare them to the amount you need to borrow and pick the most suitable one.
Some studies indicate that choosing a lower Annual Percentage Rate (APR) can save you more cash in the long term. Borrowers across the nation have saved an average of $63,151 over the term of their loans this way.
Step 5: Fill Out the Application Form
Your selected lender will ask you to fill out your personal details and the purpose of borrowing a loan. After submitting the application form you need to furnish the required documents. The form typically has a standard format and rarely varies from lender to lender.
Step 6: Get the Preapproval Letter
The loan officer issues a preapproval mortgage letter if you meet the criteria set by your lender.
Keep copies of the preapproval letter hand when making offers on properties. A preapproval mortgage letter will keep you ahead of the competition in a seller’s market.
Can I Get Preapproved for a Mortgage Online?
Yes, you can. Various institutions offer the facility to apply for a mortgage preapproval online.
Here are 3 simple steps to apply for a preapproval mortgage online.
- Apply for the Pre-approval: You can apply for a mortgage preapproval on the lender’s website. Fill out the necessary income and debt information without uploading any documents. A few institutions 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. You should also decide on the type of loan, down payments, monthly payments, and interest rates.
- Get Your Preapproval Online: After verifying all your finance the bank issues the pre-approval letter. This concludes the process of pre-approval mortgage.
Factors Affecting Mortgage Preapproval
The following factors impact a mortgage preapproval:
- Credit Score: The credit score determines the interest rate you’ll be paying for your mortgage. An ideal credit score is 740 for the lowest rate. While scores as low as 500 can get you a mortgage preapproval but at a high-interest rate.
- Debt to Income Ratio: DTI ratios should be at most 43% when dividing total debt by pretax income. But 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 20%. However, with Freddie Mac and Fannie Mae backed conforming loans 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. This includes verifying the last 2 years employment history check, full-time salary, or other hourly earnings.
- Mortgage Reserves: You should ideally have several months’ worth of mortgage payments in the bank. Lenders only occasionally 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 mortgage preapproval process, you get a pre-approval letter. This letter makes your offer attractive to home sellers and helps you negotiate better.
Frequently Asked Questions
1. How long does mortgage pre-approval take?
As early as a few hours or even in just a few days. It depends on the lender, your financial situation, and how proper your documents such as employment details and pay slips are.
2. How long does a preapproval for a mortgage last?
Generally, a pre-approval mortgage lasts for 90 days.
In case your house hunt lasts more than 90 days, you can request the lender to renew the preapproval. However, the lender may pull a new credit report, which can affect your credit score.
» How Long Does a Mortgage Pre-Approval Last? Learn in-depth about the 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?
No! You should get preapproved for a mortgage by a single lender, but it is always better to shop around and look for quotes from multiple lenders.
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.
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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