If you’re planning on buying a home, getting mortgage preapproval can give you an edge, 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 the full mortgage preapproval process, including:
• What is mortgage preapproval?
• How does mortgage preapproval vs. 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 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 pre-approved mortgage. Armed with your preapproval for a home loan (which typically arrives as a letter), 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.
Once you find a house that you want to buy, you can make an offer. And if the seller accepts, it’s 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 a commitment letter, which officially seals the deal on your loan, and you can schedule a closing date.
Preapproval vs Prequalification
If you are house hunting, you will likely hear two different terms regarding early mortgage moves: preapproval and prequalification.
Prequalification involves the review of a few financial details — usually self-reported — such as income, assets, and debt, and then estimates how much of a mortgage the lender thinks you can afford.
When you prequalify for a home loan, you get an idea of what your monthly payment might be and can shop around and see what types of terms and interest rates various lenders offer. While prequalification is not a guarantee that you will actually qualify for a mortgage, it can still be useful as it gives you an idea of how much house you can afford.
Preapproval is a more complicated process than when you prequalify for a home loan. You’ll have to fill out an application with your chosen lender, agree to a credit check, and provide information about your income and assets. 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.
Preapproval for a home loan is a more in-depth review of your finances to state that your loan application will likely move forward smoothly. Prequalification is a simpler, less involved view of your financial qualifications to get a mortgage. Here are the basic comparison points in chart form:
| Preapproval | Prequalification |
|---|---|
|
• Can provide leverage when you’re ready to get serious about buying • Requires a full application, documentation, and a credit check • Tentatively approves you for a loan amount and type |
• Can give you an idea of what you can afford as you start the process • Simpler process that just looks at a few financial details you provide • Not a guarantee that you will get approved for a mortgage |
Recommended: Preapproval vs. Prequalification: Key Differences to Know
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.
Mortgage Preapproval Pros and Cons
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: The benefits include:
• An edge in the home-buying process, as sellers will see that you are a serious buyer and have assurance that your financing won’t fall through and sink the deal.
• More time to shop around for lenders and rates before you’re in a crunch once you’ve found the house you’d like to buy. This can help ensure you get the best deal you can. Plus, your home search might be better targeted because you’ll know how much house you can actually afford.
Cons of Mortgage Preapproval: There are some potential downsides to consider as well:
• A mortgage preapproval expires. How long does a mortgage preapproval last? 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.
• Time-consuming application. 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.
• Not guaranteed. Even though your home loan preapproval letter likely has details on your loan amount and type, it is only tentative approval — you still aren’t 100% sure that you will get the loan.
Here are the pros and cons of mortgage preapproval in chart form:
| Pros | Cons |
|---|---|
|
• Can give you an edge in the home-buying process • Offers time to compare lenders and rates • Lets you know the home loan amount you can afford |
• Only lasts for a set amount of time • Requires a hard credit inquiry, which can ding your score • Does not guarantee you’ll get the loan |
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Upping Your Odds of 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?
Check Your Credit
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.
Stay on Top of Debt
Your ability to pay your bills on time has a big impact on your credit score. And 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 boost 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.
Recommended: Guide to Buying, Selling, and Updating Your Home
The Takeaway
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.
If you’re shopping for a mortgage, give SoFi a look. SoFi Mortgage Loans come with competitive rates, flexible terms, and require as little as 3% down for first-time homebuyers.
SoFi Mortgages
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