Mortgage Preapproval: Everything You Need to Know

One of the biggest steps toward homeownership is getting a mortgage preapproval. It shows you how much you can afford and allows you to shop within your budget. A preapproval also strengthens your offer for most sellers since you’ve secured financing, which makes the deal less likely to fall through.

A mortgage preapproval shows how much a lender is willing to lend you based on your financial information. To determine this, the lender reviews your credit history, debt-to-income ratio (DTI), employment history, income, assets and debts.

“If the lender feels you would be a good candidate to secure an actual mortgage loan, they will issue you a letter that you can show to a seller,” says Omer Reiner, a licensed real estate agent and owner of FL Cash Home Buyers LLC. “Such a letter tells the seller that you are likely to be able to get financing, and that makes you less risky than a prospective buyer who does not have preapproval.”

When you get preapproved for a mortgage, it allows you to:

• Get real about your budget. A preapproval letter from a lender tells you how much they are willing to let you borrow and what your monthly mortgage payment could be.
• Set your expectations. When you know how much you can afford, you can avoid wasting time viewing homes outside of your budget.
• Make stronger offers. A mortgage preapproval shows sellers that you’re a serious buyer who can secure a mortgage. This makes it more likely that you can go through with the transaction.
• Reduce timelines. A preapproval helps speed up the homebuying process. Because the lender has reviewed your finances and credit history, most of the paperwork and verification for your mortgage has already been completed.

A mortgage preapproval and prequalification are both options that help homebuyers understand how much they can borrow. However, there are some differences.

“Prequalification is a less formal status that indicates how much you might be able to borrow from a lender, based on cursory financial information a buyer provides to a lender,” Reiner explains. “Preapproval carries much more weight than a prequalification.”

A prequalification is a less formal process that provides a rough estimate of how much you may be able to borrow. The lender doesn’t pull your credit report; they will review your finances without supporting documentation. On the other hand, a preapproval requires a hard inquiry on your credit report, and the lender will need to review your finances, such as bank statements, tax returns and pay stubs.

Before getting preapproved for a mortgage, you must gather your financial information, ensure that you meet the minimum credit score requirements and choose a lender that fits your needs.

Matt Schwartz, founder of the VA Loan Network, recommends organizing your finances early. “Pull your credit report, pay down any debts if you can and start saving for closing costs,” Schwartz recommends. “One big thing—avoid taking on new debt or big purchases during the process. It can throw off your preapproval, which nobody wants to deal with.”

The lender will examine your finances to determine whether you qualify for a home loan and the amount you can borrow. You will need:

• Proof of identity: Your driver’s license or passport and Social Security card.
• Proof of income: Pay stubs, W-2s, tax returns, profit and loss statements and additional income such as bonuses, alimony and child support.
• Proof of assets: Bank statements, investment account statements and gift letters.
• Proof of employment: The lender may contact your employer to verify your employment status.
• List of debts: The lender may ask you to provide information about current debt payments, including payments for credit cards, student loans and car loans. The lender will use this to calculate your debt-to-income ratio (DTI). A higher DTI can negatively impact the chances of loan approval.

In most cases, you’ll need a minimum credit score of 620 to qualify for a conventional loan. Some loans, such as an FHA home loan, can be secured with a minimum credit score of 580.

If your credit score is low, it’s a good idea to improve it before buying a home. Even if you meet the minimum requirement, a higher credit score opens the possibility of better loan terms and lower mortgage rates.

To improve your credit score, aim to:

• Make on-time payments toward your debt.
• Pay down revolving account balances.
• Limit new credit applications.
• Avoid closing older accounts.
• Dispute inaccurate information on your credit report.

Compare offers from multiple online and traditional lenders to review the rates, fees and loan types they will provide.

“Definitely don’t just look at interest rates alone. Different lenders have all sorts of fees and terms, and not all of them communicate the same way,” says Schwartz. “Ask about their fees, how fast they usually close and even what the preapproval process is like. It’s worth checking out a few options before settling on one.”

And don’t worry about getting multiple dings on your credit report.

According to the Consumer Financial Protection Bureau, multiple credit checks are recorded as a single inquiry if you shop for a mortgage within a 45-day window. This lets you shop and get multiple preapprovals for the best rates and terms.

The preapproval process is fairly straightforward after you’ve prepared and have your financial documents ready.

You can apply for a mortgage and preapproval online. Many lenders have online applications that guide you through filling it out. The lender will request consent to pull your credit and ask questions about your financial standing. This is also where you’ll upload your financial documents, or the lender may ask you to email them.

Underwriting is the process lenders use to evaluate a borrower’s creditworthiness and financial background to assess their eligibility for a loan.

“It can take anywhere from a few hours to a couple of days, depending on how quickly you can get your docs together and how fast the lender works,” Schwartz says. “Some lenders even offer same-day preapproval if everything’s organized on your end.”

After your application goes through the underwriting process and you’re approved, the lender will issue a preapproval letter. This document shows how much the lender will loan you to purchase a home.

You can submit a copy of the preapproval letter with your offer. By doing this, you’ll stand out as a serious buyer. Some sellers may not even consider an offer unless it’s accompanied by a preapproval letter.

Preapproval letters are only valid for a certain timeframe. Most preapprovals are valid for 30 to 90 days, but the timeframe can vary depending on the lender. 

If your mortgage preapproval expires, you will need to reapply. However, you can request a renewal before expiration if you still haven’t found a home. The lender may ask for updated financial and credit information.

Applying for a mortgage preapproval is an important step toward homeownership. Not only does a preapproval letter give you a better idea of what you can afford, but it also shows sellers that you mean business. 

With your preapproval in hand, you can confidently shop for homes for sale.

Is there a down payment requirement for mortgage preapproval? No, there is no down payment requirement for a mortgage preapproval. It shows how much you can afford based on your credit score and financial situation, but it’s not a guaranteed loan offer. You make your down payment during the closing process after you’ve secured a mortgage.

Will a preapproval impact my credit score? Yes, a preapproval will impact your credit score. Mortgage lenders require a hard credit pull, which can temporarily lower your credit score by a few points.

Does preapproval guarantee a mortgage? No, a preapproval does not guarantee a mortgage. A preapproval is the first step toward getting a mortgage, but it’s not an offer set in stone. It shows the seller that you are likely to get financing.