Home LoansMortgageGetting Pre-Approved for a Mortgage

Getting Your Prequalification Letter

Once you decide you’re ready to own a house, it’s tempting to find a real estate agent and start looking at properties right away. However, to avoid falling in love with a house that you can’t afford, it’s best to get a prequalification letter from a lender first.

This document, also called a preapproval letter, outlines how much money a lender generally is willing to lend you and at what interest rate and monthly payment. It’s based on a verification of your financial situation, including your income, and it will tell you the maximum amount you may qualify for. The key word is may — the letter is not a commitment that the lender will actually loan you that amount. Instead, it’s a guideline that lets you and the home seller know what you can afford. You will officially apply for a loan later in the homebuying process.

In the past, “prequalification” and “preapproval” letters referred to different types of documents, but today they are used interchangeably. It doesn’t matter which term the letter is called — what does matter is that the letter contains enough information to show a seller that you can afford to buy the house and have a lender’s backing. Any real estate agent can review your letter to make sure it has the right information.

While a prequalification letter does not guarantee you will get a loan, it can make a difference when you make an offer on a house, especially in a competitive market. If a homeowner receives multiple offers, a prequalification letter showing that your financial health is strong could be the deciding factor.

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How to get a prequalification letter

Asking a lender for a prequalification letter should be the first step in your homebuying process, said Bryan Wright, a regional manager for Union Home Mortgage Corporation. Knowing how much a bank will lend you will set a price range for your search.

You can get a prequalification letter from a bank or mortgage lender, and it’s in your best interest to talk to multiple companies at this point. You might get a referral from friends, family or co-workers who have bought a house. Wright also recommends contacting a local or state office of the Mortgage Bankers Association to ask for names of reputable lenders. Consider interviewing several to determine whether their loan products are a good fit for your situation.

How long does it take to get a prequalification letter?

Technology has sped up the time it takes to get a prequalification letter. You can often upload the relevant documents directly from your computer or phone. If you have your ID and financial documents on hand, in some cases you can receive a letter in an hour.  

Do you need more than one prequalification letter?

The short answer is no. When you make an offer on a home, you only need to show homeowners one letter stating that a lender has verified that you qualify for a loan.  

However, it’s in your best interest to ask for letters from several lenders before you start house shopping. Each will provide a different loan amount and interest rate, which will give you an even better idea of what you qualify for and what price you can afford.

Applying for many loan preapprovals won’t significantly hurt your credit. You’ll get an initial ding on your credit score for the first hard credit pull, but all checks from mortgage lenders within a 45-day period are recorded as a single inquiry.

Does it matter where you get your letter?

Yes. It’s vital that your prequalification letter indicates that the lender has verified your financial health — and not everybody does.

Above all, make sure that the lender checks your credit and asks for documents such as W-2 forms, pay stubs and bank statements. You’ll also need to provide an ID. “If someone gives you a rate without looking at your file, it’s not an accurate rate,” Wright said. In other words, a prequalification letter that does not state the lender has verified your financial status is worthless.

A prequalification letter should include:

  • The loan amount that you prequalify for
  • The interest rate and terms (length) of the loan you prequalify for
  • A description of how the lender has verified your prequalification

What comes after prequalification?

Once you’ve received your prequalification letter, you can start shopping for a home with confidence that you can afford it. You’ll have a good idea what size of loan you’ll qualify for, and you can set parameters for your search accordingly.

An added benefit of asking for a prequalification letter early in the process is that it could flag any issues with your credit that could impact your loan application later on. Lenders typically run a hard credit check before issuing a prequalification letter, which could bring to light problems you can correct before formally applying for a home loan.

“Nothing’s worse than you putting up a thousand dollars due diligence and earnest money and you find out you don’t qualify to buy the house and you lose some of that money,” Wright said.

It’s important to know that once you’re ready to make an offer on a house, you are not beholden to the lender who provided your prequalification letter. It’s worthwhile to shop around and apply for loans with multiple lenders.

 

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