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- When a lender preapproves you for a mortgage, it tells you what loans you may qualify for and more.
- A mortgage preapproval letter is usually valid for 60 or 90 days.
- Having a mortgage preapproval letter shows sellers that you're serious about buying a home.
Mortgage preapproval is an early step in the homebuying process. When a lender preapproves you for a mortgage, it's saying it would like to work with you.
In a preapproval, the lender tells you which types of loans you may be eligible to take out, how much you may be approved to borrow, and what your rate could be.
When you apply for preapproval, you'll need to provide financial documents such as bank statements and tax forms. Lenders will also do a hard credit inquiry to find out your credit score; the inquiry will show up on your credit report and could temporarily affect your credit score.
You can apply for mortgage preapproval with multiple lenders. In fact, it's usually a good idea to get preapproval letters from several companies so you can find the best fit.
Preapproval vs. prequalification
Mortgage preapproval and prequalification are similar steps in the homebuying process. They're both ways for lenders to tell you what the terms of your mortgage could be, but they have some key differences.
When you apply for prequalification, you'll tell a lender information such as your income and credit score. But you don't have to provide any official documents, and the lender won't perform a hard credit inquiry (so your credit score won't be affected).
Mortgage prequalification isn't as thorough of a process as preapproval, so your results won't be as precise. Once a lender gets hold of your financial records and credit score through a preapproval, they can give you more accurate numbers.
Prequalification takes place before preapproval in the homebuying process. You'll probably apply for prequalification if you're just starting to consider buying a home, and you'll apply for preapproval once you're ready to shop for homes.
That preapproval requires official documentation and a hard credit inquiry, which affects your score. Preapproval letters are only valid for two or three months, so if you're still a ways out from buying, start with prequalification to get a general idea of what buying a home could mean for your finances.
Many homebuyers apply for prequalification, then preapproval, then approval.
Preapproval vs. approval
You'll apply for preapproval when you're shopping for homes; you'll apply for approval once you've actually chosen the home you want to buy.
Getting preapproved for a mortgage doesn't guarantee you'll be officially approved, because a) your financial situation may have changed in the two or three months you've been shopping for homes, and b) approval partly depends on the state of the home you want to buy.
For example, if you lose your job or your credit score plummets, a lender may decide not to approve you even if they already preapproved you for a loan.
A lender also might decide not to approve you if something goes wrong with the inspection or appraisal. For instance, if your appraisal shows the home value is significantly lower than the listing price, then you may not be approved.
How to get preapproved for a mortgage
The mortgage preapproval process can involve a lot of document hunting and answering questions from your lender, so it's best to go in prepared.
Step 1. Check your credit
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.
To qualify for a conventional mortgage, you'll typically need at least a 620 credit score. To get an FHA mortgage, you'll need a score of at least 580.
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 you have a low credit score or recent negative events, such as missed payments or foreclosure, on your report, you may have trouble qualifying for a mortgage.
Step 2. Calculate your debt-to-income ratio
Another major factor in getting preapproved for a mortgage is your debt-to-income ratio (DTI). To determine your DTI, you'll 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.
Step 3. Determine how much you have for a 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.
Step 4. Research mortgage lenders and loan types
There are countless mortgage lenders to choose from, and they all have different features and benefits. Some lenders are better 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, completely-online application process.
The right lender for you depends on your needs. Think about what features are most important to you and look for lenders that offer those things.
Once you've applied for preapproval, your lender can help you find the type of mortgage that is best for you, but it's a good idea to learn the basics of the most common types of mortgages and think about which one might be a good fit for you. That way, you can make sure the lenders you apply to offer the type of mortgage you want.
Most borrowers get conventional mortgages, but government-backed mortgages can be a good option for those with lower credit or borrowers looking to avoid a down payment.
Step 5. Gather your documentation
When you apply for a mortgage, 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. Expect to be asked for W-2s, 1099s, tax returns, bank statements, and any other documentation that provides insight into your financial situation.
Step 6. Fill out an 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.
Do I have to be preapproved to get a mortgage?
A mortgage preapproval may sound like a superfluous step in the homebuying process, shoved between prequalification and approval. Do you really need to apply for preapproval?
No, you don't have to apply. But it's probably a good idea.
First of all, applying with multiple lenders helps you compare and contrast what each offers. Comparing prequalification terms isn't quite as accurate.
Second, having a preapproval letter in hand shows real estate agents and sellers that you're serious about buying a home and can give you more clout.
When should I apply for mortgage preapproval?
Apply for preapproval once you're ready to shop for homes and plan to find your dream home 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.
If you're going to apply for preapproval with multiple lenders, then try to hit all of them within a month or so.
Why? Hard credit inquiries.
When you apply for preapproval, a lender does a hard credit inquiry. A bunch of hard inquiries on your report can hurt your credit score — unless it's for the sake of shopping for the best rate.
If you limit your rate shopping to a month or so, credit bureaus will understand that you're looking for a home and shouldn't hold each individual inquiry against you.
Tips for getting mortgage preapproval
Not sure you'll be able to qualify for a mortgage? Here are some things you can do to boost your odds of getting preapproved.
- Improve your credit. Making on-time debt payments and lowering your credit utilization can help raise your score.
- Lower your DTI. 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.
- Apply with multiple lenders. Just because one lender denied you doesn't necessarily mean every lender will. Many lenders specialize in working with borrowers with rockier credit histories. Additionally, getting offers from multiple lenders will help ensure you get the best deal.
- Seek out down payment assistance. If you don't have enough for a down payment, look for nonprofits or lenders that offer assistance.
- Find out why you were denied. If your application is rejected, the lender has to tell you why. This can help you understand what you can work on to improve your odds of getting approved in the future.