How to get preapproved for a mortgage

You’ve finally decided to buy a house. Before you start looking at listings and visiting open houses, you should strongly consider getting preapproved for a home loan. Keep reading to find out why preapproval is important — and how to get it from a lender.

What is mortgage preapproval?

A preapproval shows a seller a lender has looked at your finances and conditionally approved a home loan.

Mortgage preapproval is conditional approval from a lender for a specified home loan amount. Obtaining preapproval for a mortgage is one of the first steps in the homebuying process. When you have preapproval, sellers know you’re serious about buying and have the financial backing for a purchase.

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. Once the lender confirms your financial details, it tells you the maximum mortgage amount and gives you a preapproval letter, which you can use to make an offer on a home.

It’s important to point out that a preapproval letter does not guarantee you a mortgage. 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.

Pre-qualification vs. preapproval

Although the terms are similar, pre-qualification and preapproval refer to two separate mortgage processes, and the differences are important to know.

Pre-qualification is a more preliminary step, giving you a general idea of how much you can borrow. The lender asks for basic information about your income and debt and shows you how much house you can afford. It doesn’t verify the numbers you give or run a credit check. You can get pre-qualified online or over the phone in minutes.

Preapproval, on the other hand, is essentially conditional approval for a loan. You give the lender financial documents, such as pay stubs, W-2s and bank statements, and the lender verifies the information and runs a hard credit check. If the lender approves you, it provides a preapproval letter that shows sellers you can get a home loan. With this letter, you can officially make offers on homes. Preapproval letters are usually good for 60 to 90 days.

Benefits of getting a preapproved mortgage

There are several 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 pre-qualified. This can be especially useful in a seller’s market, where it’s not uncommon for buyers to put in offers within a few hours of viewing a house. If you’ve already received preapproval, you’ll be able to act fast when you need to.

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. If you get a preapproval letter from one lender, it lets you officially start shopping for a house, but it doesn’t stop you from researching and using another lender. Each lender may offer slightly different terms and rates. 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. Locking in a rate can be a smart move if rates are on an upward trend as you’re searching for a house.

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. If you put in an offer that’s below your preapproved amount and the seller wants to negotiate, you’ll be prepared to do this right away and won’t have to waste time getting back in touch with your lender.

The mortgage preapproval process

Mortgage preapproval is a first step in the loan process. Here are the steps to take to get preapproval:

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 DTI by adding up your monthly debt obligations and dividing it 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. Lenders are typically looking for a DTI of less than 36% and a minimum credit score of 620.
2. Research lenders: Read reviews from customers, and ask friends and family for recommendations for a mortgage lender. Try to talk with lenders on the phone before you apply to get an idea of which you’re comfortable working with.
3. Apply for preapproval: Consider applying for preapproval from two or three lenders at the outset. 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 another person not on the loan)
4. Wait for preapproval: Your lender will verify the information you provide, perform a hard credit check and let you know whether you qualify for preapproval and at what amount.

Requirements for mortgage preapproval

Lenders evaluate several factors when you apply for preapproval:

1. DTI (debt-to-income ratio): Your DTI is calculated by dividing your total monthly debt payments by your total gross monthly income. Debts in a DTI calculation include mortgage payments, car loans, minimum credit card payments, student loan payments and more. DTI does not include costs for utilities, groceries or entertainment. Lenders use DTI to determine if you have enough remaining income each month to support a mortgage payment. An ideal DTI is under 36%, but some lenders and loan types allow higher amounts.
2. Credit score: Your FICO Score is used as a measure of your creditworthiness and shows how you’ve handled credit in the past. Most conventional loans require a score of at least 620, but you’ll need a higher score (typically above 760) to obtain the best interest rate. Federally backed mortgages like FHA loans will accept borrowers with scores as low as 500, while VA loans don’t have a set minimum but will extend low rates to those with low credit scores.
3. Income and employment history: Most lenders don’t have a set income cap for borrowers, relying instead on the DTI calculation. However, they may look for steady employment in the same profession for at least two years. Lenders verify employment by contacting your employer, reviewing W-2s and checking pay stubs.

When to get preapproved for a mortgage

You should seek preapproval just before you start searching for a home. Having the preapproval letter puts you in position to make an offer once you find a house you want to buy.

Remember, the preapproval letter expires, so you want to give yourself as much time for house-hunting as possible. Check the letter for an expiration date so you know how long it lasts. If the expiration date arrives, you still haven’t found a property and you’re still in the market, you’ll need to request preapproval again.

Bottom line: Should I get preapproved for a mortgage?

If you’re serious about buying a house, you should be serious about getting preapproved by a lender. 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, start by researching lenders and learning more about each one’s preapproval process.