Getting mortgage preapproval can give you an edge in the home-buying process, especially when the housing market is tight. A mortgage preapproval from a lender lets sellers know that you have tentatively been approved for a specific loan type and amount. Not only does this show that you’re a serious home shopper, it also helps give you a good sense of your budget as you go house-hunting.
Here, you’ll learn the ins and outs of how to get preapproved for a home loan, including:
• What is mortgage preapproval?
• How do mortgage preapproval and prequalification compare?
• What are the pros and cons of mortgage preapproval?
• How can you improve your chances of getting preapproved for a mortgage loan?
• What can you do if you aren’t preapproved for a mortgage?
What Is Mortgage Preapproval?
Mortgage preapproval involves a thorough review of your credit and financial history. If you look like a good candidate for a mortgage, a lender will issue a letter stating that you qualify for a loan of a certain loan amount and at a certain interest rate. The letter is an offer, but not a commitment, to lend you a specific amount. It’s good for up to 90 days, depending on the lender.
You’ll want to shop for homes within the price range of your preapproved mortgage. Armed with your preapproval for a home loan, you can show sellers that you are a serious buyer with the means to purchase a property. In the eyes of the seller, preapproval can often push you ahead of other potential buyers who have not yet been approved for a mortgage and make it easier to compete when there are multiple offers on a house.
Once you find a house that you want to buy, you can make an offer immediately based on the loan amount for which you are preapproved. And if the seller accepts, it will be time to finalize your mortgage application. At this point, a loan underwriter will review your application and conduct other due diligence measures, such as having the house appraised to make sure it is valued at the price it’s selling for. If all goes well, the lender will issue another letter called a commitment letter, which officially seals the deal on your loan, and you can schedule a closing date.
When Should I Get Preapproved for a Home Loan?
Preapproval typically lasts for 90 days, at most, so you want to seek it when you are actively in the market for a new home. Maybe you’ve done some initial online research into available properties. Hopefully, you’ve also had a good look at your finances and thought about how much you have available to spend on a down payment as well as what amount of monthly mortgage payments you can afford long-term. It takes around 10 days after you submit a request to be preapproved, so factor that timing into your house search as well.
Mortgage Preapproval vs. Prequalification
If you are house hunting, you will likely hear two different terms regarding early mortgage moves: prequalification vs. preapproval. Prequalification is a simple, less involved view of your financial qualifications for a mortgage. Preapproval for a home loan is a more in-depth review of your finances and an indicator that your loan application will likely move forward smoothly. Each has its advantages, and its moment.
Getting prequalified for a home loan involves a review of a few financial details — usually self-reported — such as income, assets, and debt. The lender will then estimate how much of a mortgage you can afford.
Pros of Mortgage Prequalification
• It’s fast. The process can often be done in minutes, by phone or online.
• You’ll zero in on house prices. Prequalifying for a home loan quickly gives you an idea of what your monthly payment might be and how much house you can afford.
• You can shop around. You can prequalify with multiple lenders to see what types of terms and interest rates they offer.
• It’s easy on your credit score. Prequalification will not affect your credit score because it only requires a “soft inquiry” into your credit record.
Cons of Mortgage Prequalification
• It’s no guarantee. Because it is an unverified, high-level look at your finances, prequalification doesn’t ensure that you will actually qualify for a mortgage.
• It won’t help you bargain. Being prequalified won’t help you negotiate a lower price with a seller or compete against other bidders in a competitive market.
Requesting a mortgage preapproval is a more complicated process than getting prequalified. You’ll have to fill out an application with your chosen lender and agree to a credit check. The credit check will be a “hard pull” which will ding your credit score by a few points. You’ll also provide information about your income and assets. The evaluation process can take 10 days or more. Again, preapproval doesn’t mean it’s a done deal that you’ll get the loan, but it is a solid indication of your financial situation and ability to purchase a home.
There are a number of advantages to getting preapproval for a home loan, especially if you’re shopping in a fast-moving market.
Pros of Mortgage Preapproval:
• It gives you an edge. Sellers will see that you are a serious buyer and have assurance that your financing won’t fall through and sink the deal.
• It helps you get loan shopping done. When you’ve found your dream house, you don’t want to delay putting in an offer because you have to spend time getting your documents together and pursuing a loan. Going through the preapproval process helps you take care of these details before you’re in a fast-moving market.
Cons of Mortgage Preapproval:
• A mortgage preapproval expires. How long does a mortgage preapproval last? As noted above, the letter is only good for a certain period of time, usually 90 days, so you’ll want to make sure you’re seriously ready to start shopping once you have your mortgage preapproval in hand.
• The application is time-consuming. You’ll need to provide a lot of documentation to get a mortgage preapproval and agree to a hard credit inquiry, which can drag down your credit score, though usually only by a bit.
• Nothing is guaranteed. Even though your home loan preapproval letter likely has details on your loan amount and type, it is only tentative approval — you still can’t be 100% sure that you will get the loan.
Here are the basic comparison points of prequalification vs. preapproval:
• Simple process that takes only a few minutes online or by phone.
• You’ll fill out a thorough application and provide documents. The process can take 10 days or more.
• High-level financial details you provide; sometimes a “soft” credit check which won’t impact your rating.
• Full application and supporting financial documents, as well as a “hard pull” credit check that will ding your rating.
• Can give you an idea of what you can afford as you start the process.
• Lets you compare lenders and rates.
• Tentatively approves you for a loan amount and type.
• Can provide leverage when you’re ready to get serious about buying.
• Won’t give you an advantage in negotiations or a bidding war.
• It’s no guarantee you’ll get a mortgage.
• Preapproval is good for 90 days so your home-finding timeline may be affected.
• Does not guarantee you’ll get the loan.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Steps to Get Preapproved for a Home Loan
Getting preapproved for a home loan will take some time, so it’s good to get the process started before you are ready to make an offer on a home. Here are some important steps along the way.
Check Your Credit Score
If you’ve established a credit history, a first step before applying for a mortgage is to check your credit reports, which are a history of your credit compiled from sources like banks, credit card companies, collection agencies, and the government.
The information is collected by the three main credit reporting bureaus: TransUnion®, Equifax®, and Experian®. You’ll want to make sure that the information on your credit reports is correct. Ordering the reports is free once a year through AnnualCreditReport.com .
If you find any mistakes in your credit report, contact the credit reporting agencies immediately to let them know. You don’t want any incorrect information weighing down your credit score, putting your chances for preapproval at risk.
The free credit reports provided by the nationwide credit reporting agencies do not include your credit score, a number typically between 300 and 850. You can purchase your score directly from the credit reporting agencies, or from FICO®. Your credit card company also may provide your credit score for free, or you could try a money tracker app that updates your credit score weekly and tracks your spending at no cost.
Calculate Your Potential Mortgage
To help with the prequalification and preapproval process, use the mortgage calculator below to see what your estimated monthly mortgage would be based on down payment, interest rate, and loan terms.
Your credit score is only one of many factors a potential lender will consider when deciding on your mortgage qualification. So collect the many other documents you will need to paint a full picture of your financial life. Ask the lender what is needed, specifically. The list will likely include:
• Recent pay stubs
• Recent bank and investment account statements
• Two years of tax returns and/or W2s, possibly more if you are self-employed
• Verification of alimony or child support payments received and the court documents spelling out the terms of the payments
• Social Security award letter, if you derive income from Social Security
• Certificate of Eligibility from the VA, if you are applying for a VA loan
• Gift letter documenting any money you are receiving from family or other sources toward a down payment
Receive Your Mortgage Preapproval Letter
Your first instinct when you receive preapproval will likely be to jump for joy. Next, take a moment to ask the lender if they made any assumptions about your finances in order to issue the letter, or if they flagged anything that could lead to you being denied a mortgage later on, or that could increase your costs. Doing this could help you head off future problems that might scuttle a deal.
Upping Your Odds of Mortgage Preapproval
There are a number of steps you can take to increase your chances of preapproval or to increase the amount your lender may approve you for.
Build Your Credit
When you apply for any type of loan, lenders want to see that you have a history of properly managing your debt before offering you credit themselves.
You can build your credit history by opening and using a credit card and paying your bills on time. Or you could consider having regular payments, such as your rent, tracked and added to your credit score.
Recommended: What Credit Score Is Needed to Buy a House?
Stay on Top of Debt
Your ability to pay your bills on time has a big impact on your credit score. If your budget allows, you should aim to make payments in full.
If you have any debts that are dragging down your credit score — for example, debts that are in collection — it’s smart to work on paying them off first, as this could help build your score.
Recommended: Fixed-Rate vs. Adjustable-Rate Mortgages
Watch Your Debt-to-Income Ratio
Your debt-to-income ratio is your monthly debt payments divided by your monthly gross income. If you have $1,000 a month in debt payments and make $5,000 a month, your debt-to-income (DTI) ratio is $1,000 divided by $5,000, or 20%.
Mortgage lenders typically like to see a DTI ratio of 36% or less. Some may qualify borrowers with a higher DTI, up to 43%. Lenders may assume that borrowers with a high DTI ratio will have a harder time making their mortgage payments.
If you’re seeking preapproval for a mortgage, it may be beneficial to keep the ratio in check by avoiding large purchases. For example, you may want to hold off on buying a new car until you’ve been preapproved.
Prove Consistent Income
Your lender will want to know that you have enough money coming in each month to cover a potential mortgage payment, so the lender will likely want proof of consistent income for at least two years (that means pay stubs, W-2s, etc.).
For some potential borrowers, such as freelancers, this may be a tricky process since they may have income from various sources. Keep all pay stubs, tax returns, and other proof of income, and be prepared to show those to your lender.
What Happens If Your Mortgage Preapproval is Rejected?
Rejection hurts. But if you aren’t preapproved or you aren’t approved for a large enough mortgage to buy the house you want, you also aren’t powerless. You can ask the lender why it said “no.” This will give you an idea about what you might need to work on in order to secure the mortgage you want.
Then you may want to work on the factors that your lender saw as a sticking point to preapproval. You can continue to work to build your credit score, lower your DTI ratio, or save for a higher down payment.
If you’re able to pay more upfront, you will typically lower your monthly mortgage payments. Once you’ve worked to make yourself a better candidate for a mortgage, you can apply for preapproval again.
In a competitive market, having a mortgage preapproval letter in hand may give a house hunter an edge. After all, the letter states that the would-be buyer tentatively qualifies for a home loan of a certain amount.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
What happens during the preapproval process?
During the mortgage preapproval process you’ll provide lots of background information on your finances. A potential lender will also check your credit score. If the lender feels you’re a suitable candidate for a loan, you’ll receive a letter that you can show a seller to better your chances when making an offer on a home.
Do preapprovals hurt your credit score?
The lender will do a “hard pull” to obtain your credit score prior to a preapproval. This may cause your rating to drop by a few points, but it should rebound quickly if you pay your bills on time.
How far in advance should I get preapproved for a mortgage?
Get preapproved for a mortgage when you have a sense of the housing costs where you are shopping for a home, and you are ready to start looking in earnest.
Which is better preapproval or prequalification?
Prequalification and preapproval each have a place in the homebuying process. Prequalification is helpful when you are trying to get a sense of what you can afford and which lender might offer the best terms. It’s time for preapproval when you are serious about searching for a home and have researched possible lenders.
Is it OK to get multiple preapprovals?
You only need one preapproval, but it is fine to get a few if you want to see what loan amounts and rates you might qualify for. Make all applications within a 45-day window — the time frame during which multiple lenders can check your credit without each check having an additional impact on your score.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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