Can You Make an Offer on a Home Without a Preapproval Letter?

Can You Make an Offer on a Home Without a Preapproval Letter? article image.

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Submitting a mortgage preapproval letter along with your bid on a home can give you an edge over rival buyers, but you don't have to have a preapproval to make a purchase offer.

Mortgage preapproval involves going through most of the steps of applying for a mortgage loan, resulting in a lender supplying you with a letter indicating how much money they're willing to let you borrow for a home purchase, and at what interest rate and loan term. A preapproval letter communicates to the seller that you're serious about going through with a purchase and that you've got financing lined up to close the deal.

What Is the Difference Between Preapproval and Prequalification?

Mortgage preapproval should not be confused with the similar-sounding process of mortgage prequalification. Both can be helpful when you begin shopping for a home, but preapproval is a much more comprehensive process than prequalification, as we'll discuss below.

Prequalifying for a mortgage is a quick and easy process you can complete by answering a few questions for a mortgage issuer. Typically, you'll be asked to state your income and how much cash you have available for a down payment. You may also be asked about your monthly expenses, and you'll likely be asked to supply your Social Security number so the lender can check your credit score. Based on your responses, the lender will let you know whether it considers you eligible to submit a full mortgage application and, if so, roughly how much it is willing to lend you.

Prequalifying is a great way to check out a number of mortgage lenders quickly and to narrow down your choice of potential lenders. The loan amount figures generated in the prequalification process are only estimates, however—helpful for comparison purposes, but nothing you or a home seller can count on. Lenders will need to take a closer look at your finances—and collect documents backing up your income and down payment claims, as well as your monthly expenses—before extending a firm offer for a loan. It's possible that a mortgage lender who prequalifies you will ultimately offer to lend you less than your prequalification amount or, more rarely, turn down your application altogether if your financial picture changes significantly.

How to Get a Mortgage Preapproval Letter

Once you're ready to move forward on a home purchase, securing a mortgage preapproval letter from one or more lenders can give you—and, more important, home sellers—a much more accurate idea of how much money you have to spend. When you apply for mortgage preapproval, you go through essentially all the steps required in the full mortgage application process, so you'll need to submit documentation that confirms:

  • Proof of identity: A copy of a government-issued photo ID, such as a driver's license or passport will suffice.
  • Your income: This can be proved with recent pay stubs or tax returns.
  • Your monthly expenses: Mortgage lenders look at the portion of your income that goes toward debt and housing each month as a measure of your ability to afford a mortgage.
  • Your Social Security number: This is needed to confirm your identity and run a credit check.
  • Your cash savings and other investments: This is needed to ensure you can make the down payment you've offered. Availability of other assets that could be tapped to cover mortgage payments could also support an application.

If you meet their qualifications, lenders will issue you a preapproval letter indicating the amount they're willing to lend you for a home purchase. This amount isn't guaranteed, since mortgage approval always applies to a specific property and your financial situation the moment you formally apply for the loan, but it's the strongest sign of favorable financing any prospective buyer can give to a seller. (Only cash in hand would be better assurance.)

Offering a seller a preapproval letter along with a purchase offer demonstrates that you've persuaded a lender to back your purchase. In a situation where another buyer lacks similar assurances, a preapproval letter can be the deciding factor when the seller decides which bid to entertain.

Does Mortgage Preapproval Affect Your Credit?

Lenders' preapproval processes fall just short of those required for a full mortgage application, so they typically include credit checks that generate what's called a hard inquiry entry on your credit report. These inquiries tend to cause small, temporary reductions in your credit scores. Scores typically rebound within a few months, if they're affected at all, as long as you keep up with your bill payments.

It's always best to have the highest credit scores you can get before you apply for a mortgage loan, but the strategic advantage of preapproval, especially in highly competitive real estate markets, can make the small potential drop in your scores worth it. And if you follow up on a loan application with the lender that gave you the preapproval, they'll likely take any small change in score into account when issuing a final loan offer.

How to Get Your Credit Ready for a Mortgage

At least six months to a year before you apply for a mortgage, or for mortgage preapproval, it can be well worth your while to organize your credit so mortgage lenders will view it in the best possible light.

Sprucing up your credit profile could increase your credit scores, and that could mean qualifying for lower mortgage interest rates. That, in turn, could save you many thousands of dollars over the life of a mortgage.

Credit-prep steps to take include:

  • Check your credit reports and credit scores. Learn where your credit stands by checking your scores and getting your credit reports from all three credit bureaus (Experian, TransUnion and Equifax). You can get free copies of your credit reports through AnnualCreditReport.com. Review each credit report carefully to make sure it accurately reflects your credit history. If you see any inaccuracies, get them corrected as soon as possible, since they could be lowering your credit scores. When you receive a free credit score from Experian, you'll also get some explanatory notes on what's affecting it (called risk factors) and how you can make improvements. Those suggestions can help you focus on actions to take to improve your scores in the months ahead.
  • Pay every bill on time. A major influence on credit scores is payment history. Late payments—especially recent late ones—can significantly drag down your credit scores. In the months leading up to a mortgage application, make sure to pay every bill on time.
  • Avoid new credit. Applying for loans and credit cards causes hard inquiries, which can ding your credit scores, and taking on new debt can alter your monthly expenses and make lenders question your ability to afford a mortgage payment.
  • Reduce credit card debt. Lowering existing debt can also help your credit standing, and a major factor that determines credit scores is credit utilization ratio—the percentage of your credit card borrowing limits represented by your outstanding balances. Damage to your credit scores can happen when utilization ratios near or exceed 30%, so getting your credit usage below that level is a good goal—and keeping it below 10% is even better.

Taking these steps before you begin shopping for a home can strengthen your chances of getting approved—and preapproved—for the best mortgage you can get.

When you've finally found the house that meets your needs and budget, it's not necessary to submit a preapproval letter with your offer, but getting preapproved can allow you to shop with greater confidence, and give sellers greater confidence in you as well.

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