How to get preapproved for a mortgage

Getting preapproved is easy. Just submit some minimal information about your finances and credit to your lender. Now you're ready to shop for a home.

Preapproval is how much a lender is willing to lend you to purchase a home, based on your credit and financial strength. While preapproval is just an estimate of how much mortgage you can afford, it’s one of the most important steps in the home-buying process.

With a preapproval letter in hand, you can demonstrate to any real estate agent that you have the ability to pay for a house he or she shows you. In fact, many real estate agents won’t let you place a bid on a home without preapproval.

Luckily, getting preapproved is easy. Just let your lender know that you’re shopping for a home, and submit some minimal information about your finances and credit. Most preapprovals are processed within hours, and they usually take no longer than a day.

You only need to get preapproved once. But after you receive your preapproval letter, you can use it to get multiple quotes on mortgage rates; you don’t necessarily have to take out your mortgage from the lender who preapproved you, and you can actually save money by shopping around.

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How do I get preapproved?

To get preapproved, let your lender or bank know that you’re on the hunt for a home and need to take out a mortgage. Ask them for preapproval and they’ll guide you through the process. You may be able to apply on the lender’s website or over the phone.

If you aren’t sure which lender you want to go with, talk to your real estate agent. He or she has worked with a variety of lenders and might able to recommend one who works with people in your unique situation.

Getting preapproved involves a soft credit pull, which means that the bank looks at your credit but it won’t hurt your credit in the way a hard inquiry might. You’ll also be asked about your income, assets, and debt, but you won’t have to provide solid proof of this information just yet.

If you already know what you can afford, ask your lender to be preapproved for that amount. If your credit is good, they’ll likely agree with you. (If you don't know how much you can afford, you can find out your monthly mortgage costs using our mortgage calculator.)

It’s always a good idea to go into the home-shopping experience knowing how much house you can afford, so you don’t get taken advantage of by banks trying to sell you a mortgage they know you’ll default on. You may get preapproved for a much higher amount than you can afford, so it pays to be realistic about your goals.

Remember: preapproval is just an estimate. But the estimate will include all sorts of costs that you’ll have to pay when you finally take out the mortgage, and knowing these costs and their approximate amounts can give you a clearer picture about buying the home. Your loan estimate should include:

  • Loan amount
  • Interest rate
  • Monthly payment
  • Projected payment (should your interest rate change)
  • Taxes, insurance premiums, and inspection costs
  • Closing costs
  • Total cash up front to close

The debt-to-income ratio

Lenders will use the debt-to-income ratio when deciding how much to preapprove you for. This ratio is expressed as a percentage of the amount of money you pay toward your debt each month versus how much income you bring in that month. A smaller DTI ratio means you have fewer debts and can afford a higher mortgage.

But you can also use the DTI ratio to make an informed decision about your mortgage. When you get preapproved, check how much you’re preapproved for. By knowing your DTI ratio, you can tell whether the preapproval amount is too high.

Know when you want to move

Preapproval is generally good for 90 days. During that time, you’ll be eligible to place a bid on a home. But if you’re just beginning to browse home listings, you may not need preapproval just yet. In the meantime, your finances could change. You may be able to pay off high bills or get a salary increase, both of which will increase your chances of getting a preapproval with more favorable terms.

From placing a bid to closing on the home, the process can take months. Knowing when you want to move can help you decide when to apply for preapproval.

What happens if I get declined?

When a lender decides you have poor credit or that your financials aren’t strong enough to take out a mortgage, they may decline your application for preapproval. If this happens, call your lender and discuss with them what you can do to improve your chances of getting preapproved.

Preapproval is a good way to discover potential errors in your credit history. For example, the lender may tell you that you’re delinquent on a bill you don’t recognize. You’ll also get a letter stating the credit score the lender used to determine your eligibility.

The difference between preapproval and prequalification

Mortgage lenders typically use either the word “preapproval” or “prequalification” to mean the same thing. Other lenders, like Chase, use the phrase “contingent approval.”

In some cases, lenders do make a distinction between preapproval and prequalification. This happens when you provide less information about your financials to get prequalified than you would to get preapproved. For that reason, prequalification may be considered the weaker designation and you may still need to get preapproval before you shopping for a home.

What’s on the preapproval letter?

When you get preapproved, you should get a preapproval letter. This document is necessary to show real estate agents to prove that you have the means to purchase a home. The content of the preapproval letter may vary from lender to lender, but it should state some or all of the following information:

  • The address of the property
  • The sale price
  • The mortgage amount
  • The mortgage terms
  • Additional steps you have to take to close on the home

The preapproval letter will explain that it is not a commitment to purchase the home, only that the bank estimates that you have the means to do so when ready. The actual mortgage will still need to be underwritten and all associated taxes and closing costs need to be paid before you have the mortgage.

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After I get preapproved, what’s the next step?

If your preapproval amount roughly aligns with your budget and house plans, then it’s time to place a bid on the home. If the preapproval amount is below your expectations, you may need to reconsider the house you want.

However, if the preapproval amount is higher than expected, that doesn’t mean you should purchase a home you can’t afford. When your mortgage payments become unmanageable, then eventually you won’t have any home at all.

Once you and the real estate agent have an agreement about the house you want, you need to submit your mortgage application for approval to the lender. Make sure you have the required documents on hand to demonstrate your income, such as tax forms, bank statements, and a list of any debts and liabilities you have.

While preapproval is a soft credit inquiry, actual approval requires a hard pull, which will temporarily lower your credit score. But it’s necessary because it’s the only way to see your full credit history.

Additionally, credit bureaus can usually tell when you’re requesting multiple hard inquiries over a period of time because you’re applying for a mortgage (or a car loan). Generally, they will only dock you for the first inquiry as long as the subsequent inquiries are done within a specific time frame.

How to use your preapproval letter to get better mortgage rates

You only need one preapproval and it doesn’t matter which lender you get your preapproval from. Preapproval is just an estimate of what one lender thinks you can afford; your actual mortgage rates will be determined by the lender you do use at the end of the process.

But you can use your preapproved rates and terms to shop around for better mortgage rates. Here’s how:

  • Step 1: Get preapproved. With your preapproval letter in hand, you have the ability to close on virtually any home within the range set by your preapproval.
  • Step 2: Put an offer in on the home.
  • Step 3: Compare quotes from different lenders. First, check with the lender who gave you your initial preapproval and confirm your interest rates and the terms of your mortgage. Next, find another lender you trust, tell them what the first lender quoted you, and see if they can beat it. Repeat until you’re happy with the results. You’re under no obligation to take out your mortgage with the same lender who wrote you a preapproval letter.

While these steps may be time-consuming, they could save you a lot of money in interest over time. However, they need to be completed as quickly as possible to avoid violating the contract you have with the real estate agency to buy the home.

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Policygenius’ editorial content is not written by a certified financial planner or advisor. It’s intended for informational purposes only and should not be considered legal, financial, or investment advice. Consult a professional to learn what financial products are right for you.

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