The mortgage preapproval process is fairly easy. First-time homebuyers only need to submit minimal financial info and get a credit check.
Updated December 31, 2020|6 min read
Table of Contents
Mortgage preapproval is a conditional estimate from the lender of how much you can afford
Lenders need to check your credit score for preapproval, but don’t need financial documents until _actual_ approval
Preapproval involves a soft pull of your credit report, which won’t hurt your credit in the way a hard inquiry might
You can get multiple preapprovals for a mortgage — in fact, shopping around can help you get better mortgage rates
When you purchase a home, you will probably have to take out a mortgage, which is a loan specifically meant for buying a house. Mortgage preapproval is how much a lender is willing to lend you, based on your credit score and financial standing. The preapproval is just an estimate of how much mortgage you can afford — you’ll still have to get actual approval later down the line in the mortgage process.
A preapproval letter shows the real estate agent that you have the financial capability to pay for a house. (Homebuyers often won’t be able to place a bid or make an offer on a home without one.)
Luckily, getting preapproved for a mortgage is fairly easy since it involves a brief check of your finances and credit history. Most mortgage preapprovals are processed within hours, and they usually take no longer than a day.
You only need to get preapproved once and are not obligated to take out a mortgage from the lender who preapproved you. You can actually save money by seeking out different lenders who might offer you better interest rates.
Some mortgage lenders may use either “preapproval” or “prequalification” to mean the same thing. But when lenders do make a distinction between preapproval and prequalification, based on how much information they look at from the borrower. Prequalification is a broad and informal look at your financial background, so it’s usually a weaker designation or more preliminary first step. Preapproval on the other hand requires a credit check so it carries more weight.
It’s a good idea for first-time home buyers to have an idea of how much they can afford, so they don't get taken advantage of by lenders. The lender will quote you a loan amount as well as an interest rate. (You can see today’s mortgages rates here.) Keep in mind that you may get preapproved for a higher amount than you can afford, but don’t let it get to your head and try to stay within your budget.
A mortgage makes a house your own. Insurance protects it.
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You can check out how much house you can afford with our mortgage calculator, which shows your projected monthly mortgage payments.
To get preapproved for a mortgage, tell your lender — like a bank or credit union — that you’re shopping for a house and need to take out a mortgage. Ask them for preapproval and they’ll guide you through the mortgage preapproval process. You might even be able to get mortgage preapproval online on the lender’s website or over the phone.
If you aren’t sure how to pick a lender, you can ask your real estate agent, who may be able to recommend one suitable to your financial situation or unique circumstance if you have one. You might even try to get an online loan. (Keep in mind that you can and should get multiple preapprovals from different lenders, which we’ll talk about later but for now just focus on getting one preapproval first.)
Getting mortgage preapproval involves looking at your credit history. You’ll provide your Social Security number so the lender can run a credit check and look at your credit score. The FICO Score is most commonly used by lenders.
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.
When it comes time for actual approval, the lender will perform a hard inquiry. However, credit bureaus can usually tell when you’re requesting multiple hard inquiries over a period of time. Generally, they will only dock you for the first inquiry as long as the subsequent inquiries are done within a specific time frame.
Learn more about credit score.
The lender wants to know that you have enough take-home pay to be able to make your monthly payment. You will be asked about your income, assets, and debt, but you won’t have to provide documents at this stage . Based on your estimates, the lender will consider your debt-to-income ratio when deciding how much to preapprove you for. This is a ratio expressed as a percentage of the amount of money you pay toward debts each month versus how much income you have that month. A smaller DTI ratio means you have fewer debts and can afford a higher mortgage.
Knowing your DTI in general can help you better understand your financial situation, and know if the mortgage preapproval amount is too high or too low.
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 mortgage preapproval. You can call them to find out what credit score they used to determine your eligibility and talk about what you can do to improve your chances of getting preapproved for a mortgage in the future.
If your mortgage preapproval was declined because of a low credit score, you might consider an FHA loan. Backed by the government, this type of mortgage loan is more lenient towards borrowers with low income or low credit score.
Mortgage preapproval is generally good for 90 days. If you still haven’t found a home within that time, you can reach out to the lender to extend your preapproval and issue you a new preapproval letter. They may also check your credit history again to reverify that your financial situation has not significantly changed.
Once you’ve been preapproved for a mortgage your lender will give you a preapproval letter. You’ll need to show this document to the real estate agents to prove that you have the means to purchase a home.
The preapproval letter explains 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 approved and underwritten, so during this time homebuyers should refrain from making any money decisions that could make the lender change their mind. The buyer’s financial standing will be more heavily scrutinized, including a hard inquiry of your credit history.
When you’re ready to apply for actual mortgage approval, you’ll need to show the lender hard documents — including proof of employment, pay stubs, bank statements, W-2s and federal tax returns, and information about other debts and liabilities, like student loans.
You only need one mortgage preapproval and it doesn’t matter which lender you get your preapproval from. Then you can reach out to another mortgage lender, show them your mortgage preapproval letter, and ask if they can give you a better rate.
Keep in mind that you are under no obligation to take out your mortgage with the same lender who wrote you the first preapproval letter.
While it may seem time-consuming, shopping around for a mortgage lender could save you a lot of money in interest over time.
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