Getting a mortgage preapproval is a crucial stepping stone on your way to becoming a homeowner, but it doesnâ€™t mean youâ€™re in the clear to borrow from a lender just yet. A preapproval does give you a leg up over the competition, though.
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What is a mortgage preapproval?
A mortgage preapproval means a lender has vetted your credit and finances and has made an initial loan offer based on its findings. Lenders share this information in writing, so you may hear it referred to as a preapproval letter.
Getting prequalified for a home loan is not the same as a preapproval. Mortgage prequalification provides a rough estimate of how much you might qualify for, based on a surface-level review of your financial information.
A preapproval, however, is a more thorough vetting of your finances and provides a more accurate idea of what a lender may offer in terms of a loan amount and interest rate. You provide financial documentation and agree to a review of your credit profile, which means the lender will pull your credit reports and scores. With a prequalification, you typically self-report your financial information and lenders donâ€™t check your credit.
5 steps to getting preapproved for a mortgage
Itâ€™s not worth falling in love with a house until you know the sales price matches up with a mortgage amount you can realistically afford. Hereâ€™s how to get preapproved for a mortgage.
Determine your homebuying timeline. The best time to apply for a mortgage preapproval is before you start house hunting. You may want to hold off on a preapproval if youâ€™re not quite ready to begin the homebuying process. Even if youâ€™re not yet prepared, you can get started by pulling your free credit reports from each bureau at AnnualCreditReport.com and reviewing minimum mortgage requirements.
Review and improve your credit profile. With your credit reports in hand, itâ€™s time to look for areas of improvement. The minimum credit score you need for a mortgage varies by program type, but youâ€™ll need at least a 620 credit score in many cases. Dispute any inaccurate information you find, keep your credit card balances low and consistently pay your bills on time. Refrain from applying for new credit and closing any of your existing accounts, too.
Pay down your debt. Pay down your debt. Aside from your credit scores, lenders care about how you manage your debt now and how youâ€™ll fare if you get a mortgage. Your debt-to-income ratio, or the percentage of your gross monthly income used to repay debt, should stay at or below 43%. The less debt you have, the less risky you appear to lenders.
Gather your documents. Lenders will request several documents from you for a preapproval, including:
Government-issued photo ID
Social Security number
Bank statements from the last 60 days
Pay stubs from the last 30 days
Two years of W-2s or 1099 tax forms
Credit reports and scores from all three bureaus
Apply with multiple lenders. Consider banks, credit unions, mortgage brokers and nonbank lenders when applying for a mortgage preapproval, and shop around with three to five lenders to get the best rates. Additionally, keep your shopping period within 14 to 45 days to minimize the impact of those credit inquiries against your credit scores.
How long does a mortgage preapproval last?
A mortgage preapproval typically lasts for 30 to 60 days. The average time to close on a house is 48 days, according to Ellie Maeâ€™s latest Origination Insight Report, so thereâ€™s a chance you can get through the full homebuying process before time runs out.
If your preapproval letter expires before you close, youâ€™ll need to go through the process again, submit documentation and have your credit reports and scores pulled, which creates a new credit inquiry and affects your score.
Pros and cons of mortgage preapproval
The mortgage preapproval process includes several benefits, but there are also drawbacks to consider.
Home sellers take you more seriously because youâ€™ll have proof that a lender is willing to back you when you submit an offer.
You can comparison shop before committing to a lender.
Even if your preapproval is denied, you may walk away with an analysis of where you stand financially and how you can improve.
A preapproval is not a full approval. It doesnâ€™t guarantee youâ€™ll qualify for a mortgage.
Preapprovals typically last for 30 to 60 days. If you donâ€™t buy a home within this time frame, youâ€™ll need a new mortgage preapproval letter.
Making changes that affect your credit, such as applying for a new credit line or racking up debt, can prevent you from getting a full mortgage approval.
What happens after you get preapproved for a mortgage?
Once youâ€™ve been preapproved and have chosen a mortgage lender, itâ€™s time to find your home and submit an offer to buy it. Youâ€™ll also continue working your way through the mortgage approval process, which includes:
Providing your lender with any additional documents needed to finalize your loan.