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Getting preapproved for a mortgage is a smart move anytime you're shopping for a house. It requires you to go through most of the steps necessary for a full-blown mortgage application so you can understand how much home you're likely to be able to afford—and how much lenders will let you borrow to do so. Here's how the process works.
What Is a Mortgage preapproval?
A mortgage preapproval is a document a lender produces to tell a home seller how much money you are authorized to borrow to buy a house. Additionally, a mortgage preapproval usually indicates the type of mortgage loan you qualify for, and the interest rate the lender would charge you upon completion of a mortgage application. The preapproval document states the lender's belief that it would approve your mortgage application based on the income and credit information you've submitted.
The information required to get a mortgage preapproval is the same that's required for a mortgage loan application. In fact, applying for preapproval is the same as applying for a mortgage loan: The lender will review your personal information, credit history, credit score, income, assets, debts, tax returns and employment history. It also requires you to authorize a lender to view your credit score and examine your credit report from one or more of the three national credit bureaus (Experian, TransUnion and Equifax).
Mortgage Preapproval vs. Prequalification: What's the Difference?
When you're shopping for mortgages, you'll likely encounter a process called mortgage prequalification, which should not be confused with mortgage preapproval. Mortgage prequalification generates an estimate of how much money you may be eligible to borrow—but no details on interest rates, fees and the like—after you answer a few quick questions online or over the phone about your income, assets and debts.
Mortgage preapproval is a much more formal process that requires you to complete a detailed mortgage application form (either hard copy or digital), submit supporting documentation to back up your financial claims, and undergo a thorough examination of your credit reports and scores. Because applying for mortgage preapproval is essentially the same as applying for a mortgage loan, you may also have to pay an application fee.
Some real estate agents might like to see a mortgage prequalification before agreeing to work with you. But because a prequalification may not include any examination of your credit history or other documentation proving your finances, it won't carry nearly as much weight with sellers as a mortgage preapproval.
What Do You Need for a Mortgage Preapproval?
Because mortgage preapproval requires submitting a mortgage application, it's a detailed process. Items you should be prepared to submit with your application include the following:
- Personal details: The lender will require proof of identity, such as a copy of a passport or a driver's license, and your Social Security number.
- Permission for a credit check: You'll also be asked to authorize access to your credit reports and your credit score. It's wise to check your credit report and credit scores yourself at least six months before starting the preapproval process to avoid surprises and to give you time to clear up any credit report inaccuracies that might be lowering your credit score.
- Income information: To document your income, you'll need to provide pay stubs, bank statements and tax returns for the past two years. If you are self-employed, the lender will average the annual incomes you reported on your tax returns for the previous two years.
- Assets and debts: Mortgage lenders typically like to see indications that you have resources available to cover your loan down payment and to help make your loan payments in case your employment status or income changes. Assets can include savings, investments and property you own. Outstanding loans and credit card balances will appear on your credit reports, but you'll also be asked if you have any other debts as well.
Note that requirements for down payments and other assets may vary by loan type:
- Qualifying loans that meet the requirements for purchase by Fannie Mae and Freddie Mac, the federal government-sponsored enterprises that acquire most of the nation's single-family mortgages, require 20% of the purchase price as a down payment.
- Conventional mortgages obtained through banks, credit unions and mortgage brokers typically require a minimum down payment of 5% (but require purchase of private mortgage insurance if the down payment is less than 20%).
- FHA loans for first-time home buyers are backed by the Federal Housing Administration (FHA) and are available with down payments as low as 3.5%.
- VA loans issued to veterans, service members and their qualifying surviving spouses through the Department of Veterans Affairs (VA) are available with no down payment.
- USDA loans, available to low-income borrowers buying homes in rural areas of the U.S., are also available with no down payment.
Finally, you may be asked to pay an application fee of up to several hundred dollars.
Lenders typically generate preapproval letters within a day of submitting your application. However, if you are self-employed, or if the lender requires additional verification of any part of the application, preapproval could take up to two weeks.
How Long Does a Mortgage Preapproval Last?
Your preapproval letter will state that the preapproval is valid for a limited period of time, such as 60 or 90 days from the date it was written.
The lending terms spelled out in a preapproval document may not be guaranteed; sometimes a preapproval application fee includes a rate lock-in that's guaranteed for the life of the preapproval letter.
Absent that, if prevailing interest rates rise or your income or credit score drops between the preapproval process and when you apply for your mortgage, you may be charged a higher interest rate or offered a lower total loan amount than the one specified in the preapproval letter.
If you decide to finalize a mortgage from the lender that issued your preapproval, you may need to submit updated versions of that information to the lender before the loan can be completed. Whether that's required depends on the lender's policies and the amount of time between the preapproval and your acceptance of a loan offer.
How a Mortgage Preapproval Affects Your Credit
The credit check required for a mortgage preapproval is identical to the one performed when you apply for a mortgage. This check is considered a hard inquiry on your credit report, which can temporarily lower your credit score a few points.
If you fill out several applications in the process of shopping for a new loan, credit scoring systems treat the credit checks related to those applications as a single event, as long as you make them within a few weeks of each other. Note that the various FICO® Score☉ models will combine inquiries made within the same 45-day period and treat them as one event; the VantageScore® system uses a rolling two-week window that resets each time you make a similar loan application within two weeks of the one that preceded it.
This allows you to shop around for the best possible terms without worrying that each credit inquiry will harm your ability to qualify for a new loan.
An Important Part of the Homebuying Process
Obtaining a mortgage preapproval can be an important step in the homebuying journey. Providing a preapproval document with a purchase offer letter demonstrates to a home seller that you are ready to move forward quickly with a sale, and that you have the means and intention to do so.