If you’re at the start of your homebuying journey, getting preapproved for a mortgage is one of the first steps.
Preapproval helps you determine your budget and show sellers you’re serious about buying. That can make a critical
difference in a competitive real estate market. A mortgage preapproval letter is a document from a lender conditionally
offering you a mortgage. It contains the loan terms — including the dollar amount, monthly payments and interest rate —
and is the lender’s promise that, unless your financial situation changes by the time of purchase, you’ll be approved under the outlined terms.
Even though the terms are often used interchangeably, preapproval is different from prequalification. A lender will typically
prequalify a borrower without any credit check or documentation. It’s a rough estimate of how much they’ll be able to borrow.
When you’re getting preapproved, though, the lender will verify your creditworthiness. You’ll need to complete a mortgage
application and provide documentation, such as recent pay stubs, bank statements and tax returns. The lender will also perform
a hard credit check, so your credit score will temporarily drop a few points.
To get a formal preapproval letter, however, the institution will need to review your tax returns and other paperwork, which can take up to 10 days.
A preapproval letter has an expiration date that varies by lender, though most are active for 30 to 90 days. During that time you can shop for
a home and formally apply for a mortgage.
Why mortgage preapproval is important
There’s no legal requirement to get preapproval — and it will (temporarily) ding your credit score — but a preapproval letter is a good idea for two reasons.
You’ll find out what you can afford
While you can estimate how much house you can afford using an online calculator or by prequalifying, preapproval will give you a more accurate idea of your price range. Basic preapproval to get a loan quote can usually be done online in a matter of minutes.
You’ll position yourself as a serious buyer
Sellers prefer buyers with a preapproval letter because it shows that you can secure a mortgage and are seriously looking for a home.
In competitive markets where they can afford to be picky, that can make all the difference.
A verified preapproval letter is more involved, however, requiring you to upload or submit financial paperwork.
How to get mortgage preapproval
Since preapproval is a more rigorous process than prequalification, you should have all your ducks in a row before applying.
Check your credit score
Your credit history will play a big part in the lender’s decision, so its important to see how you stand.
You can use a credit monitoring service from your credit card issuer, such as CreditWise® from Capital One. You can also check your credit by using a free service from Experian — Experian free credit monitoring. The higher your credit score, the better the terms you’ll receive on a mortgage.
Gather documents
A lender will need to see documentation of your income, assets, debts and other aspects of your personal finances.
While every lender has different requirements, having these at the ready is a good starting point:
At least two most recent pay stubs
Tax returns from the past two years
Bank statements from the last 60 days
Employment verification documents
Employer contact information
List of your debts
Investment account statements, including 401(k) and IRA
Proof of rental payments or landlord contact information
Gift letters (if you’ve been gifted money for your down payment
Apply for preapproval
Most larger mortgage providers allow you to apply for preapproval on their website. Typically, you input your desired down payment and loan amount, as well as your contact information, Social Security number and details about your income, assets, real estate holdings and credit.
You can usually receive preliminary preapproval online in a matter of minutes and get an estimate of how much house you can afford. A verified preapproval letter, however, usually requires you to upload W2 forms and other documents and can take up to 10 days.
A house is a huge investment, so get several quotes to find the best rates and terms. Each quote involves a hard pull on your credit but, if you get them all within a few weeks it usually only counts as one negative event, rather than multiple.
Once you receive a preapproval letter, you can use it when you make an offer to indicate your viability and seriousness.
GOOD LUCK....Don't waste a minute....Get it done FIRST before looking for that special home.