How to Get Preapproved for a Home Loan
Making a list of must-haves for your new home and looking at different properties can be fun. However, you shouldn’t skip an important step in the home-buying process – getting preapproved for a mortgage.
According to the Consumer Financial Protection Bureau, nearly half of those taking out a mortgage don’t shop around when choosing a lender. That’s a big mistake. Comparing lenders could save you thousands of dollars in interest.
When you get preapproved by several lenders, you can review your options before you’re in the midst of a time-sensitive closing. It’ll also give you a realistic budget, which is one reason you want to get preapproved early in your home search.
Why is getting preapproved for a home loan important?
Having a preapproval letter from a lender can be particularly advantageous in a competitive buying market. Not only does submitting a preapproval letter with your offer show sellers that you’re a serious buyer, you’ll also be showing them that you have the means to buy the home. Some sellers may even request or require a preapproval letter with your offer.
Casey Fleming, a mortgage adviser and author of “The Loan Guide: How to Get the Best Possible Mortgage,” recommends clients get preapproved before working with a real estate agent. Generally, with a preapproval letter, “you are approved for the loan, subject only to property conditions, such as the appraisal and inspections,” says Fleming.
Once you’re preapproved, you’ll also know exactly how much you can afford to spend, which can help you weed out properties way outside your budget. Although you shouldn’t necessarily aim to buy the most expensive home you qualify for, knowing how much you could spend can save you time by narrowing your search.
Going through the preapproval process will also force you to get all your documents in order, which you’ll eventually need to do for the mortgage application process anyway. So, why not get a head start?
Here’s how to get preapproved for a home loan
The first step is gathering the documentation you’ll need to apply for preapproval. Depending on the lender, you may need to bring physical documents into a local bank branch, or you might be able to submit everything electronically. If you’re applying for a mortgage with a co-applicant, you may also need to submit their information.
- Personal information. Includes your full name, contact information, photo identification and Social Security number for a credit check. Submit a copy of your divorce decree if you’re divorced.
- Income verification. Tax returns and W-2s from the last two years and recent pay stubs. If you receive child support, alimony or any other regular sources of income, you’ll want to include those as well. Also, if your income is primarily based on commission or bonuses, you may need to provide a clear breakdown of how you were paid over the last two years.
- Additional assets. A list of assets, such as bank accounts, investment accounts, retirement accounts and other properties. You may need to share the last few months’ bank account statements for your checking and savings accounts.
- Monthly debt obligations. Monthly payments you make on loans or credit accounts. You could be asked to list the creditor’s name and contact information, as well as the outstanding balance and your minimum monthly payment. Include alimony or child-support payments as monthly obligations.
- Residential information. A list of all the homes you lived in during the previous two years. If you rented, you may need to share your landlord’s contact information.
- Where you’re buying. Although you won’t have a specific address, the lender may ask which neighborhoods you’re planning to buy in and what type of home you want.
The application could be more complicated if you’re self-employed. You may be able to verify your income with the previous two years’ business tax returns and profit and loss statements, as well as your business’s current balance sheet.
If friends or family members are gifting or lending you money for the purchase, you could need a letter from them verifying the amount and circumstances.
Once the mortgage lender has all your information, they can review your file and submit it for preapproval. There’s a credit check, and the lender may contact your current employer as well as your previous employer if you recently changed jobs, to verify that you still have a job.
Todd Huettner, president of residential mortgage bank Huettner Capital in Denver, Colo., warns that there may not be a universal definition as to what qualifies as a preapproval. “It could range from the lender doing just a little more work than a prequalification, all the way to a complete loan application but the address says TBD,” he says.
Huettner says, “If you haven’t sent them tax returns, a photo ID, income verification or other supporting documents, then the lender is just making a guess and isn’t going through a rigorous preapproval process.” Although the lender may say you’re preapproved, and even give you a preapproval letter, there isn’t a guarantee that you’ll qualify for the mortgage come closing time.
The importance of shopping around
When comparing lenders, it’s important to compare the interest rates and loan terms. However, you won’t know what you qualify for unless you shop around and get preapprovals from multiple lenders.
Shopping lenders doesn’t have to be difficult. Since you already have your documents ready, you could simply apply directly with several lenders. LendingTree, for example, makes the process simple. You can fill out one online form, and you have the potential to get offers from multiple lenders all at once. The online form asks for some basic financial information, but LendingTree only performs a soft pull on your credit, so you don’t have to worry about dinging your credit score.
If you decide to move forward with any of the offers you might receive, that’s when a hard credit pull will be performed by the lender, and they’ll give you a final quote. You shouldn’t worry about getting hard pulls from multiple lenders, so long as you do it in a short window of time. Credit-scoring models recognize that consumers may want to shop around to find the best terms. As a result, multiple inquiries for the same type of loan made within a short period (14 to 45 days, depending on the scoring model) are treated as a single inquiry for credit-scoring purposes.
When you are getting quotes from lenders, make sure you’re giving them the most accurate financial picture possible. Otherwise, you may be disappointed in the results.
“The best rate is meaningless if you can’t get the loan closed,” says Huettner. “If you’re not providing all the information, then their preapproval evaluation isn’t based on all the facts.”
He’s had clients get turned down by their bank for a loan, in spite of a having a preapproval letter, because when the bank first preapproved them, the bank didn’t consider additional financial obligations like alimony and child-support payments.
Remember, you’ll generally need to share all this information to complete the official mortgage application process later. So even when a lender says they can get you preapproved based on minimal information, it may be worth the extra upfront work to go with a lender who will ask lots of questions and can show you realistic mortgage options.
Huettner also suggests asking the individual loan officer about their industry and job experience to determine if you want to work with that particular person.
What if you can’t get preapproved for a home loan?
Getting turned down during preapproval can be discouraging, but it’s not the end of the world. “We can either lower our sights and look for something less expensive, or create a plan to work on the issues, depending on what they are,” says Fleming. Finding out now may be better than getting turned down after you’ve spent hours looking for a home or paying for an inspection and appraisal.
One option is to apply for preapproval with other lenders. “Sometimes the lender didn’t calculate something correctly,” says Huettner. “Or the lender may have an overlay — a rule that’s stricter than the Fannie Mae or Freddie Mac requirements.” Because lenders have different qualification criteria, you may still qualify for a mortgage with a different lender.
You should also try to figure out why the lender denied your preapproval. If it was because you don’t qualify for as much money as you asked for, you could reapply with a smaller request and start looking at less expensive homes, as Fleming suggests.
However, if you don’t qualify because of your debt-to-income ratio or credit score, you may need to pay down debts, increase your income and build your credit before trying again.
Another thing to consider is that even if you find a mortgage lender that preapproves you, the fact one lender denied you may indicate that you’re not eligible for the lowest interest rates or best terms. If you’re not in a rush to buy a home, it may make sense to improve your credit and overall financial situation and then apply when you may qualify for better terms.
Frequently asked questions about mortgage preapprovals
- Is prequalification the same as preapproval?
- Should I get preapproved before working with a real estate agent?
- How long does it take to get preapproved for a home loan?
- Does a preapproval letter guarantee what kind of home I can get approved for?
- Do preapproval letters expire?
- Does getting preapproved commit me to the mortgage process?
- Will getting preapproval affect my credit score?
They may sound similar and are sometimes used interchangeably, but prequalification isn’t the same as preapproval.
Prequalification can also give you an approximation of how much you can borrow based on what you tell a mortgage lender, but it may be a simple process that doesn’t involve verifying the information and may not include a credit check. As a result, prequalification doesn’t hold as much water as preapproval.
“Preapproval means you’ve submitted all of your income and asset documentation,” says Fleming. The lender will then verify your information, run your credit and put your file through an underwriting process. Although preapproval doesn’t guarantee you’ll be approved later, the extra steps make a preapproval letter more valuable (and potentially more accurate) than a prequalification letter.
Yes, especially if you’re looking for a home in a hot market. Some real estate agents may insist that you have a preapproval letter before they show you homes.
“You need to know what you can and can’t do before you spend hours comparing homes,” says Huettner. “Otherwise you might be wasting time.” You could even wind up spending hundreds of dollars on inspections and appraisals and then find out you don’t qualify for a mortgage to buy the home.
The timing varies depending on the lender and its process. If you submit all the necessary information with your preapproval application, you could get an answer within a day or two (and sometimes within minutes).
“Pricing and guidelines vary by property type,” says Fleming. “Condos can be more expensive than detached homes, and you need more down for three-unit or four-unit properties than for one- or two-unit properties.” So, although the preapproval letter might not list a specific property type, that information is important and should be taken into account during the preapproval process.
Yes, a preapproval letter could expire within 60 to 90 days. Fleming says you may be able to renew the offer by submitting updated documentation.
“The preapproval process should be where you do your shopping,” says Huettner. But you’re not locked in by the preapproval process, and you can switch lenders if you want.
Using one of the companies that already has your documents can simplify the closing. However, Huettner says, “if there have been more than one or two delays, especially if they don’t tell you the reason for the delay and what the resolution will be, consider switching.”
Because the lender is checking your credit for a lending decision, a hard inquiry will be added to your credit report, and it could lower your score. If you’re applying for preapprovals or mortgages from multiple lenders, that’ll lead to multiple hard inquiries, which could result in a bigger negative impact on your score.
But FICO’s scoring models, which most mortgage lenders use to evaluate applicants, recognize that people shop lenders and only wind up taking out one mortgage.
Inquiries that occurred within the previous 30 days aren’t considered by the FICO’s scoring models when you apply for a mortgage. Also, multiple inquiries during a 14- to 45-day period (depending on the scoring model) are treated as a single inquiry for scoring purposes.
In short, you won’t be penalized for shopping lenders, but you may want to wait to apply for preapproval until you’re serious about buying a home. Your first inquiry will be when you apply for preapproval, and lenders may check your credit again right before you close on a home.