How to Get Preapproved for a Mortgage

Buying a home is a significant financial decision and being well-prepared is vital. One of the most important steps to getting a mortgage is to be preapproved, or at the very least prequalified. In this Q&A, Derek Green, Vice President and Chief Credit Officer for Roxboro Savings Bank, explains how to get preapproved for a mortgage, answers common questions, and helps you understand the importance of mortgage preapproval and prequalification.

What Does It Mean to Get Preapproved for a Home Loan?

It means you’re ready to buy a home now! Practically speaking, it means your lender has evaluated your credit history, income, and down payment capacity and found that it tentatively meets their mortgage underwriting requirements for a home loan, up to a given price range.

How is Preapproval Different From Prequalification?

Prequalification is typically a faster process that may not require comprehensive verification of your income, assets, or a hard credit check, but it should allow the lender to gather and evaluate information to reasonably conclude whether or not you appear to meet the requirements for a home mortgage.

A preapproval requires more effort on the part of the homebuyer and lender. The homebuyer would typically provide documentation to the lender such as paystubs, W-2 forms or tax returns to verify their income, along with bank statements to verify funds required for closing.

That said, some lenders don't officially give preapproval letters, but their prequalification process may be more stringent and detailed. They may go so far as to have the buyer begin to complete a mortgage application and go through everything except the appraisal. That way the customer will know what their mortgage would look like and that no issues will be creeping up.

It’s important to recognize though that neither a preapproval nor prequalification is a guaranteed loan offer, but both are useful in letting REALTORs and home sellers know that you're a serious buyer.

How Far In Advance Should I Get Preapproved for a Mortgage?

I suggest you contact your lender as soon as you think about buying a home. Starting early allows you time to plan your budget, tackle any potential issues that exist in your credit history and get your credit in order, and zero-in on things that you need to do to prepare yourself for buying a home. Even if you are a couple of years away from buying a home, a good lender will spend the time with you to help you prepare, even if you’re not ready to buy a home today.

I have a lot of people who are first-time homebuyers who come in, and they don't know what to do. They just know they want to buy a home, and they need a little guidance. We'll usually talk about their credit history, talk about their income, and find out what the source of their income is. The whole time, I'm taking notes, and I'm looking to make sure that what they're telling me is within the guidelines of the mortgage. We're going through the whole process. I find out what type of home they're looking to buy and find out where they're looking to buy, so we've got a pretty good understanding upfront of what their plans are.

Then, with that information, I'm able to give them a target and say, you need to be looking for homes that are under this amount or maximum this amount. That way, when they're out shopping, they know what to look for, and they're not looking for $800,000 houses when they can only afford a $300,000 house.

Once a home is identified

Once the buyer identifies the home that they want, I usually have them email me a copy of the listing or send me the address. That way, I can give them what we consider to be a strong pre-qualification letter that will specifically reference the address of the home. In my opinion, I think it holds a little more weight with a seller or a real estate agent that, as the lender, we have actually looked at the house online and have a pretty good understanding of it and that we're comfortable financing it.

What Are the Steps to Getting Preapproved for a Mortgage?

The steps to become prequalified or preapproved are similar, but the preapproval process may require more effort on the part of the homebuyer and lender and could take more time as the lender reviews and verifies the financial information provided.

Before contacting a lender, it’s always a good idea to check your credit report and obtain your credit score. This allows you to address any issues or discrepancies beforehand and improve your chances for a successful outcome.

The most important step in the process is to seek a reliable mortgage lender to work with, starting with people and institutions you already know and trust. If it’s your first time buying a home or if you’re new to the area, ask financially savvy friends for a referral. Once you’ve found a reputable lender you are comfortable working with, you’ll be asked to provide information regarding your income, assets, current debt obligations, and credit history. With this information, most lenders are able to issue a prequalification immediately.

What Criteria Does Someone Need to Meet to Get Preapproved?

Simplistically, getting a mortgage preapproval requires three things:

1. Income
2. Assets
3. Credit history

A homebuyer should be able to demonstrate their ability to make a new mortgage payment from a stable and verifiable income source, they should have assets available to pay any necessary down payment or loan closing costs, and a credit history is needed to prove their creditworthiness.

What Credit Score Do You Need to Get Preapproved for a Mortgage?

The higher the credit score, the better! In general, a person with a credit score below 620 will find it challenging, if not impossible to obtain a conventional mortgage. But, this can vary from lender to lender. Some may have an absolute minimum credit score cutoff, while others may be more concerned with the content of the report. If you find yourself having trouble getting preapproved for a mortgage, you should find out why. The best way to do that is by obtaining a copy of your own credit report.

Can Someone With Bad Credit Get Preapproved?

Mainstream mortgage lenders generally do not extend approval to applicants with bad credit. However, if someone is denied due to their credit history, they should find out why, and work to fix the problem. Consumers can get a free copy of their credit report from each of the three major consumer credit bureaus. These are Equifax, Experian, and TransUnion. It’s relatively easy to obtain the reports online by visiting AnnualCreditReport.com.

Is There a Downside to Getting Preapproved for a Mortgage?

Yes, there are a couple of potential downsides to consider.

• After receiving a prequalification or preapproval, you may have a false sense of certainty that you have received a guaranteed loan offer. In fact, your approval is typically subject to a number of conditions that must be met. If your income or credit standing changes, or if the home you decide to buy does not meet the lender’s requirements, you may not be able to obtain the loan.
• If credit inquiries are done, it could make a small but temporary impact on your credit score.

Despite the potential downsides, the benefits of mortgage preapproval more than outweigh the potential drawbacks.

Are Preapproval or Prequalification Letters Only Good for a Limited Amount of Time?

Preapproval or more detailed prequalification letters are usually only going to be good for between 30 and 90 days with 60 days probably being the norm. The longer you go from the preapproval, the less relevant it is because so many things can change with your financial situation. If you get a car loan or if you start charging a whole bunch on your credit cards, those sorts of things will definitely affect your preapproval or prequalification status.

How Many Mortgage Preapproval Letters Should I Get?

There is no need to get preapproved with multiple lenders. If you choose a reputable lender who is well-known in the market, one mortgage preapproval letter is sufficient.

Is There Anything I Should Keep In Mind After I Get a Preapproval?

After you receive a preapproval letter and begin trying to find a home, there are a couple of things that you should keep in mind.

1. It’s important to let your lender know if there are any interim changes to your employment or income as it may have an adverse effect on your ability to obtain a mortgage. Also, before you make any significant financial transactions, obtain any new debt, or make any significant purchases, discuss your plans with your lender beforehand so you can evaluate the impact it could make and avoid pitfalls.
2. While shopping for a home, keep tabs on what mortgage interest rates are doing. Rate increases will result in a higher mortgage payment and may limit the amount you qualify to borrow. Likewise, rate decreases may allow you to borrow more!
3. Once you find a home and have made an offer on it, you'll need to do your due diligence with it and so will the lender. Your final mortgage approval will be contingent on a number of things such as the title search for the property and the appraisal.

Bottom Line For How to Get Preapproved for a Mortgage

The bottom line on mortgage preapprovals and prequalifications is that it is worth your time to take this step before making an offer on a house and going through the formal loan application process. It lets you know ahead of time whether you’re likely to qualify for a mortgage and will make you more appealing as a potential buyer for home sellers.

Derek offers this piece of advice for those who get denied for the loan amount that they need. "Remember that it’s never a ‘no,’ but it may just be a ‘not right now’. Find out what the issue is that's standing in your way and make a plan to work through it."