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- A mortgage preapproval shows what you may qualify for based on an initial review of your finances.
- You'll usually need a preapproval letter to start making offers on homes, since it shows you're a serious buyer.
- Preapprovals are typically good for 60 to 90 days, so you'll want to start shopping for homes right away.
If you're getting ready to start the homebuying process, one of the first steps you'll likely take will be to get preapproved for a mortgage.
Getting a mortgage preapproval can help you understand how big of a loan you could qualify for and how much you could end up paying each month on your mortgage payment. Having a preapproval letter when you shop for homes also shows home sellers that you're a serious buyer, improving your chances of getting your offer accepted.
What is mortgage preapproval?
Mortgage preapproval is an early step in the homebuying process. When you apply for preapproval, a mortgage lender takes a precursory look at your finances and decides whether or not it's willing to lend to you based on the information is looks at.
In a preapproval, the lender tells you which types of mortgages you may be eligible to take out, how much you may be approved to borrow, and what your rate could be.
Being preapproved for a mortgage doesn't mean you'll ultimately receive full approval.
Why is preapproval important in the homebuying process?
You can't get fully approved for a mortgage without a contract to purchase a home. Preapproval helps you get an idea of what your homebuying budget should look like as you start shopping for homes.
Home sellers also generally expect homebuyers getting a mortgage to include a preapproval letter with their purchase offer. This shows that you're set up to go through with the purchase, and aren't just wasting their time.
Preapproval vs. prequalification
Mortgage preapproval and prequalification are terms that are often used interchangeably, even by lenders. You may see prequalification described as being less reliable than preapproval, since lenders don't verify your financial situation with a prequalification. But the truth is that, as the Consumer Financial Protection Bureau points out, there's no strict definition for either of these words.
If you're wondering how reliable your lender's preapproval process is, pay less attention to which word they use and instead look at how they're evaluating your creditworthiness. Does the preapproval rely only on self-reported financial information, or did the lender ask for documents verifying your income and assets?
The more verification the lender does for a preapproval, the more likely you are to ultimately receive full approval for a loan in the amount you were originally preapproved for.
Preapproval vs. approval
You'll apply for preapproval when you're shopping for homes; you'll apply for approval once you've had an offer accepted on a home.
Getting preapproved for a mortgage doesn't guarantee you'll be officially approved. If your initial preapproval missed something that precludes you from getting a mortgage, or your financial situation has changed since you received the preapproval, you may no longer qualify.
Full mortgage approval also partly depends on the home you want to buy. For example, if the home appraises for less than what you agreed to pay for it, the lender will adjust the amount it's willing to lend you.
Requirements for mortgage preapproval
Essential documents for preapproval
When you apply for a mortgagee, your lender will go through your finances to verify that you can afford the loan. This means you'll need to provide documentation showing your income and assets.
Your lender will tell you exactly what documents you'll need, but having everything ready ahead of time can help the process go more smoothly.
Income verification
To verify how much you earn, a lender will ask for things like W-2s, 1099s, or tax returns. If you have other sources of income, like child support or disability benefits, be sure to provide documentation for those as well.
Asset documentation
The lender will also want to see that you have enough money to cover your down payment and closing costs. This means you'll be asked to provide recent statements from the accounts you intend to tap into for these costs.
Credit history
The lender will also check your credit to be sure you have a sufficient credit score and that you haven't experienced any negative credit events, like foreclosure, in the recent past.
Credit score requirements
Here are the minimum credit score requirements for the most popular types of mortgages:
- Conventional loan: 620
- FHA loan: 580, or 500 with a 10% down payment
- VA loan: Varies by lender, often at least 620, but some lenders allow as low as 580
- USDA loan: Varies by lender, often at least 640
Debt-to-income ratio explained
Your credit report will also tell the lender what other loans you owe, so it can calculate your debt-to-income ratio (DTI).
To determine your DTI, take all of your minimum monthly debt payments and divide that number by your gross monthly income.
Typically, the highest DTI you can have and still qualify for a mortgage is 50% (including the proposed monthly mortgage payment). But depending on your lender, the type of loan you're getting, and what the rest of your financial situation looks like, you may be required to have a lower ratio.
Determine your down payment
As part of your application, the lender will want to know how much money you have saved for your down payment. If you're receiving money from a family member to help with your down payment, you'll likely need to have them write a letter explaining that the funds are a gift.
Conventional mortgage borrowers can put as little as 3% down, while FHA borrowers need to put down at least 3.5%. Some mortgages, including USDA and VA mortgages, allow no down payment.
The preapproval process
When should I apply for mortgage preapproval?
Apply for preapproval once you're ready to shop for homes and hope to get an offer accepted in the next two or three months. Preapproval letters are usually only valid for 60 or 90 days, so you don't want to get your letter too early.
Choosing a lender
There are countless mortgage lenders to choose from, and they all have different features and benefits. Some lenders are best for first-time homebuyers because they offer things like down payment assistance or the ability to work with borrowers who don't have a credit score. Others are more tech-focused and offer a convenient, online mortgage lending process.
While you're still searching for homes, you don't need to commit to working with the first lender you got preapproval from. This can be a good time to compare different lenders and get preapproved with more than one to see who can offer you a better deal.
Alternatively, some borrowers prefer to get preapproved with just one lender and then apply for full approval with multiple lenders once they're under contract on a home. With this method, you'll likely get more accurate rate quotes, since you're closer to closing and more of the details of your loan are locked in.
Completing the preapproval application
When you're ready, you can start your preapproval application. Many lenders offer the ability to do this online, but you can also typically get started over the phone or, if the lender has physical branches, in person.
What to expect after applying
Once you've applied for preapproval, the lender will get back to you after a certain amount of time with its decision. If you're approved, you'll be able to see what types of mortgages you're eligible for and how much you can borrow. At this point, you'll want to start seriously looking at homes.
If you aren't preapproved with one lender, that doesn't mean you'll be rejected by every lender you apply with. Find out why you weren't approved and search for lenders that may be more willing to work with your financial situation.
Tips for successful mortgage preapproval
Improving your credit score before applying
Before you start applying with lenders, you'll want to get an idea of what your credit situation looks like and how likely you are to obtain preapproval.
You can check your credit score using a free service like Credit Karma. Your credit card issuer may also provide your score for free on your monthly statements.
You should also request a copy of your credit report from each of the three major credit bureaus through AnnualCreditReport.com. Make sure all the information in these reports is accurate. If you find something wrong, file a dispute.
If your score is somewhat low, you can work on improving it by making on-time debt payments and lowering your credit utilization.
Reducing your debt-to-income ratio
Paying off a loan or paying down a credit card with a high balance can lower your DTI and give you more room for a monthly mortgage payment.
The lower your DTI, the more likely you are to get a good mortgage rate.
Understanding how much you can afford
It's important to go into this process knowing how much you can comfortably afford to spend on housing each month.
Mortgage lenders look at your DTI to understand how big of a housing payment you can afford, and they don't generally care if you have enough money left over each month to pay for dinners out, movie tickets, or other expenses that make your life more enjoyable.
Look at your entire budget when determining how much you can afford to spend on a mortgage. Just because your lender approves you for a certain loan size doesn't mean it's a good idea to borrow that full amount.
After receiving your preapproval
Next steps
After you're preapproved for a mortgage, you'll have to start the often long and arduous process of finding a home. Once you have an offer accepted on a property, you'll apply for full approval with the lender (or lenders) of your choice.
How long preapproval lasts
Preapproval letters typically expire after 60 to 90 days. Your lender will tell you exactly how long your preapproval is good for.
Updating your preapproval
If you don't find a home before the preapproval expires, you'll need to get preapproved again. The lender will do a new check of your credit and finances to see if anything has changed.
Mortgage preapproval FAQs
A mortgage preapproval isn't going to do you much good if you aren't ready to start shopping for homes. Talk to a real estate agent first to get an idea of whether there are any homes in your area that fit your budget (a mortgage calculator can help you estimate how much you can afford). Then, once you're ready to start shopping, apply for preapproval.
How long mortgage preapproval takes depends on how much information your lender requires. Some lenders advertise a "preapproval in minutes" that does a less thorough check of your finances, while others offer fully underwritten preapprovals that require lots of documentation. This means preapproval could take between a few minutes to a few days, depending on your lender's process.
If the lender does a hard check of your credit for a preapproval, your credit score may temporarily go down a bit.
Yes, you can ultimately be denied a mortgage after preapproval. If your financial situation changes or the home appraisal comes in low, you may ultimately not receive final approval.
Increasing your credit score, lowering your debt-to-income ratio, or saving for a larger down payment can make you a more creditworthy applicant and improve your chances of getting preapproved for a mortgage.
You should get quotes from multiple mortgage lenders to compare rates and fees and make sure you're getting the best deal. You can do this at the preapproval stage of the homebuying process, or once you're under contract and ready for full mortgage approval.
