Mortgage 101

What Is a Mortgage Preapproval and How Does It Work?

Published on: January 6, 2022

mortgage preapproval

mortgage preapproval is an essential part of the homebuying process. Getting a mortgage preapproval involves submitting a mortgage application and a thorough vetting of your credit, income, and finances.

Getting preapproved before you begin house hunting will let you know how much home you can afford. In turn, you’ll be able to set a realistic budget for a home and narrow your search to properties that fit within your price range. Understanding how the mortgage preapproval process works and the key requirements involved might make for a smoother homebuying experience.

What is preapproval for a mortgage?

A mortgage preapproval is a process lenders use to determine if you are eligible for a home loan. During the mortgage preapproval process, lenders make a preliminary decision on whether they will lend to you and how much.

Going through the mortgage preapproval process, especially in a competitive market, positions you as a serious buyer when working with a real estate agent and home sellers. You’ll also be able to make offers on homes quickly and strategically since you’ll have a clearer idea of the loan amount you’ll qualify for.

Should you get into a bidding war during the homebuying process, having a mortgage preapproval will work in your favor. Sellers typically prioritize offers from preapproved buyers over shoppers starting from scratch in terms of financing.

How does mortgage preapproval work?

During the mortgage preapproval process, your lender will review your credit, income, and other financial information to tentatively decide if they will lend to you and how much you can afford.

What is a preapproval letter?

Once your lender preapproves you, they’ll provide you with a preapproval letter that will include:

  • Property purchase price.
  • Loan amount.
  • Loan term.
  • Loan type.
  • Preapproval expiration date.

When working with a real estate agent and submitting offers, your preapproval letter will be included as part of the offer package that’s sent to sellers for consideration.

What’s the difference between preapproval and approval?

While you’ll submit your financial information during the mortgage preapproval process, receiving a mortgage preapproval doesn’t mean you’re approved for a loan. The main difference between preapproval and approval is the mortgage preapproval is not a guaranteed loan offer, whereas an approval is.

A mortgage preapproval signals that a lender is willing to work with you and provides a tentative loan amount. It is based on your expected ability to afford a mortgage payment and not on a particular home purchase. On the other hand, the mortgage approval comes after you’ve made an offer on a home and submitted a loan application. The lender will complete a full review of your financial details, the home’s value, and the property details before approving you for a loan.

Keep in mind, a mortgage preapproval is typically good for 30 to 60 days. If your home search goes past the expiration of the mortgage preapproval, you’ll need to go through the preapproval process again.

What’s the difference between preapproved and prequalified?

You’ll often hear two terms regarding the mortgage preapproval process: mortgage preapproval and mortgage prequalification. While some people use the two terms interchangeably, lenders may treat these tasks differently.

What does preapproval mean?

A mortgage preapproval means a lender has reviewed your mortgage application and checked your credit and other financial information to determine if they’re willing to work with you. They’ll also provide an approximate loan amount you might qualify for. Typically, a mortgage preapproval carries more weight than a prequalification during the homebuying process.

What does prequalification mean?

A prequalification may be different from a mortgage preapproval for some lenders, but it depends on their process. In some instances, a lender may base a prequalification only on the estimated information you provide rather than verifying things like your income, employment, credit score, debts, and assets.

When should I get preapproved for a mortgage?

Buyers who get a mortgage preapproval before they begin house shopping have an advantage over buyers who have not gone through the process. Real estate professionals prefer to work with preapproved buyers, and some sellers will only accept offers from buyers with a preapproval letter.

Additionally, preapproved buyers know what size loan they will likely qualify for and can avoid falling in love with a home only to learn it’s outside their price range. Also, buyers who have gone through the home loan preapproval process can quickly and confidently make an offer when they find a home they can afford.

For these reasons, it’s advantageous to go through the preapproval process for mortgage loans before you begin house shopping seriously or start working with a real estate agent. Some buyers may consider getting a preapproval even earlier to get an idea of where they stand. Doing this provides an opportunity to address any issues.

Here’s a look at where preapproval falls in the homebuying process.

  1. Decide you’re ready to begin home shopping.
  2. Check your credit and gather your financial documents.
  3. Get a mortgage preapproval.
  4. Hire a real estate professional.
  5. Begin looking at homes.
  6. Make an offer and negotiate.
  7. Go through the underwriting process.
  8. Schedule an optional home inspection.
  9. Close on the home.

What do I need for a mortgage preapproval?

Lenders vary in their requirements for a home loan preapproval and in what documents they request. The type of loan you are applying for will also determine what documentation the lender will need from you.

However, expect to show proof of your employment, income, assets, and other personal details. Be sure to provide updated and accurate information, as giving your lender incorrect details about your situation could delay your preapproval or even cause a denial.

Your mortgage advisor will let you know what documents to gather for the preapproval process for a mortgage; however, most lenders will request the following:

  • Pay stubs for the past 30 days.
  • W-2 forms for the last two years.
  • Signed federal tax returns for the last two years.
  • Proof of other sources of income.
  • Bank statements for the past two months.
  • Proof of your down payment.
  • Proof of assets, including retirement and investment accounts.
  • Identification.
  • Social Security number.

Mortgage preapproval FAQs

How long does a mortgage preapproval last?

A mortgage preapproval is typically good for 30 to 60 days. Your lender will include the expiration date in the preapproval letter. Keep in mind, if the home loan preapproval expires before you find a home, you may need to reapply for a mortgage to get a new preapproval letter.

Should I get preapproved with multiple lenders?

Some buyers choose to get a home loan preapproval from several lenders; however, doing so is unnecessary. While the preapproval process for a mortgage gives you an idea of how much you can borrow, it is not a guaranteed loan approval. Also, you are not obligated to move forward with the lender who gave you the mortgage preapproval. If you’re shopping around with multiple lenders, the best way to compare loan details is to review a loan estimate from each lender after submitting your complete application.

Will getting preapproved multiple times hurt my credit score?

If you seek a home loan preapproval with many lenders, each one​​ will likely make a hard inquiry during the preapproval process for a mortgage. However, credit bureaus treat multiple inquiries for the same type of loan as a single inquiry as long as they occur within 45 days. The credit bureaus recognize that numerous inquiries within a short time frame mean a consumer is loan shopping.

Can I take out loans or make large purchases after being preapproved for a mortgage?

It’s not a good idea to make significant changes to your finances after getting a preapproval. Keep in mind, this is not a final loan approval. During the home loan preapproval process, a lender bases their decision on the information you provide at the time. If you have a significant change to your finances between receiving the preapproval letter and submitting your full application, your lender could decline your application or lower the approval amount.

What happens if a lender declines my mortgage application?

If a lender denies you during the preapproval mortgage process, find out the exact reason so you can address it. For example, if your debt-to-income ratio caused the denial, you could offset that by paying down some of your debt. Or, if your employment history is too short, you may need to wait before reapplying. Finding out the exact reason for the mortgage preapproval denial will inform your next steps. If the lender denies you based on information in your credit report, they will provide you with the credit bureau’s name that supplied the report and information on requesting a copy.

If you’re ready to start the preapproval mortgage process, contact a local Finance of America Mortgage Advisor today.

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