How To Get A Mortgage Preapproval
What is mortgage preapproval?
Mortgage pre-approval is the stage between the initial pre-qualification and the mortgage application. It essentially tells you how much a lender is willing to lend you and the type of loan you are eligible for in your current situation. Getting pre-approved requires a tough credit check that affects your credit score while pre-qualifying usually doesn't.
Pre-approval is an essential step for home buyers because it makes your purchase offer more competitive. Sellers are more likely to sell to someone who has already been pre-approved for a loan than someone who hasn't.
It is important to note that mortgage pre-approval is not a commitment by the lender to make the loan and you will still need to get approved for the mortgage when you decide to buy the home.
3 Steps to Getting a Mortgage Preapproval
Here are the three steps to follow in order to get pre-approval for home loan.
1. Get a mortgage preapproval letter
If you're ready to start looking for a home, your first priority should be to get a mortgage pre-approval letter from a lender. The pre-approval letter shows the seller (and the real estate agent who advised them) that you are serious about buying a home and know how much you can afford.
It's possible to get pre-approved in under an hour, but it can take up to 10 business days depending on how much documentation your lender requires and current processing speeds. Once you receive your preapproval letter, you can include it in your offers to home sellers to indicate that you are a serious buyer.
2. Review Your Credit Report
Visit AnnualCreditReport.com 12 months before you approach a lender to get a free copy of your credit report from the three national credit bureaus—Equifax, Experian and TransUnion.
If you can identify any errors or major deficiencies in your credit history and try to fix them, you can save both yourself and your lender time.
3. Contact Multiple Lenders
Comparing multiple mortgage lenders can help you find the lowest rates and fees. Consider requesting pre-approval from multiple lenders within a 45-day period to minimize the impact on your credit score. Credit bureaus treat multiple inquiries within this 45-day period as a single inquiry.
Also, you may want to get in touch even before you apply for a pre-approval or mortgage -- six to 12 months, for example -- to get all your ducks in a row. Reaching out to a lender 12 months in advance "may seem too early," says Christopher Jordan, branch manager for Main Street Home Loans in Silver Spring, Maryland. “But if there is something you need to work on, it gives us time to prepare. It can take four to six months to fix a credit problem, and we want to make sure we allow enough time [in the buying process].”
Choosing a mortgage lender
A first-time home buyer might assume that all mortgage lenders offer the same thing: money to buy a home. After all, mortgage lending is a competitive industry in which individual lenders – especially at the local level – rarely differentiate themselves in a publicly visible way.
Now that many large, national mortgage lenders have moved the pre-approval process online, buyers may feel tempted to go with the fastest or least-invasive option. Nevertheless, small differences in mortgage lenders can help avoid regrettable decisions and even secure meaningful savings over the long term.
Any lender can quickly pre-approve a buyer for the maximum amount that their company allows based on certain variables. However, a listing agent will learn over time that customers of these lenders are more likely to encounter problems before closing. This is one reason why real estate agents are a good resource for finding lenders.
Agents are incentivized to work with lenders who can properly guide buyers and help ensure they are ready to complete the transaction.
Michael Fischer, managing broker and vice president of Homestead Realtors in Atlanta, says, “I encourage my clients to use me as a resource, because I know local lenders who will do a good job. They can rest assured that I have already vetted the lender and confirmed that it can negotiate a deal on competitive terms.'
Still, Fisher encourages customers to contact more than one lender to get the best possible interest rate and to have access to a variety of loan options. Ultimately, it doesn't matter which lender the buyer uses, a good agent will work to establish a relationship with that lender as part of building a strong team around the buyer.
When to get mortgage preapproval
If you're ready to start looking for a home, you should consider getting pre-approved. With an active pre-approval letter in hand, you will significantly increase your chances of getting your purchase offer accepted.
How To Get Mortgage Pre-Approval Online
Nowadays, many lenders allow you to get pre-approved online. The main advantage of doing this is speed. While many lenders can take one to three business days to process your pre-approval application and deliver a pre-approval letter, some online lenders generate a pre-approval letter as soon as you submit your application.
To get an online mortgage pre-approval, start by looking for a reputable online mortgage lender and make sure you have the following documents:
- copy of your social security card
- Employment W-2s are generated over a number of years
- pay stubs
- Recent statements for each bank and investment account
- Tax returns for at least the last two years
Buyers often procrastinate on this task, simply because they do not know where to start while selecting a lender. They may also be concerned about choosing the "wrong" lender, especially if they fear wasting their time or missing the home purchase deadline.
How long does it take to get a mortgage preapproval?
The speed at which a lender pre-qualifies a potential borrower varies. This largely depends on how quickly you collect and submit the required documents and how long it takes them to review your financial paperwork.
Once the lender has all your information, you should receive a loan estimate within three business days – much less if you use an online mortgage lender – that will let you know you got pre-approved. whether or not and how much.
How long does a pre-approval last for a mortgage?
Mortgage pre-approval is not indefinite, but the length of time varies depending on the lender. Most mortgage pre-approvals are valid for 30 to 90 days and then expire.
Mortgage preapproval vs prequalification
Mortgage pre-approval and pre-qualification are different, so don't confuse the two. Articles about home buying may mention both words in the same sentence, but a buyer who gets "pre-qualified" hasn't really accomplished much. The process usually only involves a conversation or a credit score review.
Since prequalification does not verify financial data, identify red flags or address potential issues, it will not improve the buyer's standing with the seller's team. Buyers would benefit more from focusing on pre-approval, which would take longer but actually impact the buying effort.
Mortgage pre-approval represents the lender's offer to lend money to the buyer based on certain financial circumstances and specific conditions. The lender reaches this point only after reviewing and verifying the buyer's credit status, employment, income, assets and/or tax returns.
Even though a pre-approval letter gives the buyer the right to proceed towards buying a home, it does not limit the buyer's lending options. There is no obligation on the buyers to get the loan from the lender with whom they have negotiated, shared financial documents or obtained a pre-approval letter.
Mortgage preapproval vs approval
Mortgage pre-approval lets you get a personalized floating rate for your desired loan amount and tenure after the lender has verified your income and assets. The floating rate may increase or decrease with the prevailing market.
Mortgage pre-approval is not a guarantee of getting a home loan. You still need to apply for a mortgage with a lender before you can get any money.
When you apply for a mortgage, you'll need to provide the same documents along with the purchase agreement for your new home. Mortgage approval also requires a home appraisal to determine the loan-to-value (LTV) ratio.
Mortgage preapproval precautions
For almost any potential home buyer, the pre-approval process offers substantial benefits. From a transaction perspective, the lender's endorsement can strengthen any purchase offer submitted by the buyer. And, for a buyer's personal finances, the steps involved in pre-approval can help the buyer better understand the implications of various payment amounts – upfront and on an ongoing monthly basis.
However, these pre-approval benefits come with some important conditions that buyers would like to note. The personal financial circumstances that form the basis of a lender's willingness to grant a mortgage to a buyer can change over time. As a result, the mortgage pre-approval will expire after a certain time period, such as 90 days.
If the buyer hasn't gone under contract at that point, the lender will need to re-run the pre-approval checklist using updated financial data as needed. For these reasons, pre-approval does not guarantee the loan or any special terms. The mortgage that the lender ultimately extends will depend on the exact conditions at the time the buyer needs the money.
Don't let worry or a lack of information discourage potential buyers from starting the mortgage pre-approval process.
"I wish people weren't so afraid of getting their credit checked," says Jordan. Your credit score will not go down as a result. It's far more valuable to find out in advance whether your credit is good or needs work. You don't want to find yourself saying, "I wish I had started this process four months ago." In fact, FICO, the credit scoring service, won't penalize buyers for multiple lender credit checks within a short time frame.
What if my mortgage pre-approval expires?
Most mortgage preapproval letters expire after 90 days. After that, you will have to reapply and go through the verification process again. Lenders have expiration dates to help ensure that there is no significant change in your income, debt or credit.
last step before closing
For all the assurances that a mortgage pre-approval letter makes, only a loan commitment letter indicates final mortgage approval. When a seller accepts an offer on their home, the buyer will complete at least one complete mortgage loan application. The terms, including fees and other costs, may differ in the estimate documents the buyer receives from the lender.
Even at this late stage of the home buying process, there is still significant value in shopping around and comparing offers. The buyer will then select their preferred lender and schedule a property valuation. Once the lender completes the underwriting process, they can issue a loan commitment letter.
Mortgage pre approval in sight
Katerina Matsa finally closed on her first home purchase in late 2018. Looking back, she only now appreciates the important financial role her lender played in the home-buying process.
“If I could go through the pre-approval process again, I would have a more in-depth conversation with the lender about my mortgage options. I'll ask more questions and make sure I fully understand the various details. Everything happened so fast. That was the downside of starting the process so late."
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