How to Get Preapproved for a Mortgage

How do I get preapproved for a mortgage?

When you are ready to start the loan process, a preapproval letter will make the whole thing easier.

Preapproval shows a seller that a lender has looked at your finances and conditionally approved a home loan.

When you first meet with a lender for preapproval, you provide financial documentation, like pay stubs and bank statements, that helps the lender decide the terms of a potential loan. One reviewer said they were given preapproval from a lender based on the buyer’s word and credit score alone.

Once you are ready to take out a loan, the lender will need to verify your financial information to make sure nothing has changed. The property must also meet the lender’s standards. If your financial situation changes or there is an issue with the property, the loan may fall through.

Here’s how to get a mortgage preapproval, broken down step by step.

Step 1: Assess your finances

Take a look at your income, savings and debts to ensure you’re in a good place financially to buy a house. Calculate your debt-to-income (DTI) ratio by adding up your monthly debt obligations and dividing the total by your gross monthly income. Lenders will also do this calculation, but if you know your DTI ahead of time, you’ll be better prepared. You should also review your credit report for accuracy and know your credit score.

Step 2: Research lenders

Finding the right lender can make a big difference in your mortgage experience and how much you pay over time. Take time to compare your options before choosing one.

Follow these steps to research lenders:

• Compare interest rates and fees: Look at rates from several banks, credit unions and online lenders. Even a small rate difference can save you thousands over the life of your loan.
• Check licensing and credentials: Make sure each lender is registered with the Nationwide Multistate Licensing System (NMLS). You can search the NMLS Consumer Access site to confirm they’re legitimate.
• Read customer reviews: See what other borrowers say about their experience, especially how the lender handles communication and closing timelines.
• Ask for recommendations: Friends, family or your real estate agent can share trusted lenders they’ve worked with.
• Test their customer service: Call or email lenders with questions before applying. A good lender will clearly explain terms, answer your questions and make you feel comfortable.

Comparing lenders carefully helps you find one that’s transparent, reliable and offers a rate that fits your budget.

Step 3: Apply for preapproval

Lenders evaluate several factors when you apply for preapproval:

Consider applying for preapproval from two or three lenders to get the best rate. Many lenders allow you to submit information online or over the phone. Make sure you have your Social Security number handy and have thought about a down payment amount. Be prepared with hard or virtual copies of financial documents, including:

• Tax returns from the last two years
• Pay stubs, W-2s or other proof of income
• Bank statements and investment account statements
• Gift letter (if your down payment is being supplied by a person not on the loan)

Step 4: Wait for preapproval

Once you’ve applied and submitted your documents, your lender will verify your information, perform a hard credit check and determine the amount you’re preapproved for.

If you qualify, most lenders issue a preapproval within one to three business days. Some online lenders may approve you the same day if your finances are straightforward, while complex applications can take up to a week.

Preapproval letters are usually good for 60 to 90 days, after which you’ll have to go back to your lender to get it updated. The preapproval is based on your finances at the time of application, so it’s usually not a good idea to make big financial changes, like taking out a new loan or opening a new credit card, while you’re in the homebuying process.

» LEARN: Does mortgage preapproval affect your credit score?

Benefits of getting a preapproval letter

Getting a preapproval letter shows sellers and agents that you’re seriously looking to buy.

“Unless you plan to pay all cash for a home purchase, obtaining a preapproval letter not only provides confidence to other parties that you can get a loan but also is a strong indicator to realtors that you are serious about buying a home and (not) just a lookie-loo,” said Daniel Kerr, a senior financial advisor at Running Point Capital in El Segundo, California.

“Additionally, since the lender has already reviewed your financial documents during the preapproval process, (it’s) a shorter closing process.”

Here are some other benefits to getting preapproved for a mortgage before you start house-hunting.

• It gives you an advantage over other buyers: Getting preapproved for a mortgage gives you a leg up on other potential buyers who haven’t contacted a lender or who are only prequalified.
• You can shop around for the best terms: It’s always a good idea to get quotes from at least two different lenders when you’re shopping for a mortgage. Try to get all quotes within a 30-day span to minimize the effect on your credit score.
• You can lock in a good rate: When your lender supplies you with a preapproval letter, you may also have the option to lock in the interest rate. The rate you get can be valid for up to 60 days. Not all lenders offer this feature, and many will charge you for it.
• You can negotiate: By getting preapproved, you know the maximum amount a lender will let you borrow. Keep in mind that just because a lender approves you for a certain dollar amount doesn’t mean you have to spend that much — and don’t forget to budget for closing costs, insurance and other fees.

Prequalification vs. preapproval: What’s the difference?

Although the terms are similar, prequalification and preapproval refer to two separate mortgage processes, and both have separate benefits.

• Prequalification: The lender gives you a general idea of how much you can borrow based on your income and debt. Since it doesn’t require a credit check, you can get prequalified online or over the phone in minutes.
• Preapproval: The lender gives you conditional approval for a loan based on a hard credit check and your financial documents, like pay stubs, W-2s and bank statements. With this letter, you can officially make offers on homes.

Keep in mind that neither prequalification nor preapproval guarantees final loan approval. Your lender will still need to verify your financial information, recheck your credit and review the property details during underwriting. If your income, credit score or debt level changes before closing, your loan terms — or even your approval — could change.

» READ MORE: What credit score is needed to buy a house?

FAQ

Bottom line

If you’re serious about buying a house, then getting a mortgage preapproval letter should be your next step. Most real estate agents recommend you have a preapproval letter in hand before they start showing you houses — especially in competitive markets.

If you’re ready to start looking at homes, begin by researching lenders and learning more about each one’s preapproval process.