Are you wondering how to get preapproved for a mortgage? If you start searching for a new home before you know how much you can afford, you could be setting yourself up for disappointment.
As you might expect, getting pre-approved for a mortgage is paramount when buying a home. If you get a mortgage pre-approval before you begin your search, you will avoid wasting time by looking at properties out of your price range.
There are some nuances you need to understand, such as the differences between a mortgage pre-approval vs. a pre-qualification which we are going to discuss.
Let’s take a look at what you have to do to get approved for home loan mortgages and everything you need to understand about the process.
What are mortgage preapprovals
During preapproval for a mortgage, your lender will look at your income and expenses as well as your assets and your credit score to establish how much they can lend to you. This will show how much you can afford to spend on a home and the interest rate you will likely pay.
Comparing preapproval to prequalification
As well as preapproval, you might hear about prequalification when finding out more about your mortgage options. Sometimes these two terms are used interchangeably, though they probably shouldn’t be.
While prequalification is similar to preapproval, it doesn’t involve as thorough an examination of your finances. When you are looking to get approved for mortgage loans, a preapproval will give you a more accurate picture of how much the lender is willing to give you.
Prequalification means you need to provide less information, and the lender won’t make an inquiry on your credit report, verify your income, or check on your employment. With a pre-qualification, the lender is only giving you an estimate of what you can afford.
When you actually apply, you could be in for a nasty shock if the loan amount is lower.
One thing worth mentioning that can be rather confusing is that some lenders call their pre-approval letter a pre-qualification. Regardless of what it’s called, the vital thing is making sure the lender has checked the buyer’s credit score, income, and employment.
Without doing that, the document is worthless.
Comparing preapproval to approval
Preapproval helps you search for a home, but you’ll need approval when you find the home you want to buy. Even though you may have a preapproval from a lender, it doesn’t guarantee that they will fully approve you for the loan when you need it.
Approval requires more details about the home you intend to buy, including the appraisal value and confirmation of the title ownership. Your lender will check with a title company to make sure the seller really owns the property and that they don’t have any liens or claims against it.
The lender also needs to know how much the home is worth. This means that you will have to pay for an appraisal so that the lender can be sure you aren’t offering more for the home than it’s worth. The lender wants to make sure that they don’t stand to lose out, should you end up in foreclosure in the future.
Sometimes there are other requirements as well. If you are getting a loan backed by the FHA, you can expect the home to have to meet certain standards. This means the roof will have to be in good condition and there can’t be broken windows or other obvious issues like peeling paint.
Getting a mortgage preapproval
To win preapproval for a mortgage, you are basically going through the lender’s loan application process. Since your lender will want to know your financial situation as much as possible, you will need to provide a lot of information.
They will want to be sure you are who you say you are and have the income and assets you claim. To check on this, expect to be asked for your social security number, pay stubs, bank statements, W-2 statements, and more.
Once you have satisfied their information request, you can expect to find out if they have preapproved you and for how much in a few days. When you have been preapproved, your lender will give you a mortgage preapproval letter.
This letter can be used to show real estate agents so that they know you are a serious buyer. This letter is also often a requirement for you to be shown homes and makes sure you aren’t wasting their time on a house you can’t afford.
For this reason, you should apply for preapproval as soon as you want to get serious about looking for a home. Savvy real estate agents will never let their clients accept an offer without seeing a valid pre-approval letter.
The benefits of being preapproved
Having this housing preapproval helps you narrow down the house you can afford and puts you in a stronger position when making an offer to a seller.
When you are trying to purchase in a seller’s market, where there are many more buyers than homes, it can give you an advantage. If you have secured preapproval and other buyers haven’t, the seller will be more likely to go with your offer since it is closer to being approved by a lender.
It will also mean that large parts of the mortgage approval process have already been completed, which should speed everything up when you decide to close on a home.
Does preapproval affect your credit score?
Your lender will make a hard inquiry on your credit report, and this will drop your credit score slightly and temporarily. If you make a few more preapproval or approval applications with lenders soon after that, it won’t have any further effect on your score.
Increase your credit score before getting a mortgage pre-approval
One of the more crucial factors influencing the mortgage rate and terms you will receive from a lender is your credit score. If you have a marginal score, it behooves you to increase it as much as you can. Doing so gives you more favorable rates, which means more money in your pocket for the time in which you hold the mortgage.
One way to bump up your credit score quickly is to use a credit improvement company that provides you with helpful guidance to make the right credit decisions.
Working to improve your credit? This tool can help you fix errors and make disputes. Try it free for 14 days.
The bottom line is getting your financial house in order can save you lots of money before getting mortgage pre-approval.
How long is a preapproval good for?
Your lender should make it clear how long their preapproval lasts. You can typically expect this to be two or three months to give you the time to find a home.
If you don’t find somewhere you like within that time, you will have to renew the preapproval. This means supplying some updated information but not everything you needed for the initial preapproval.
Closing thoughts on mortgage preapprovals
Going through the mortgage pre-approval process gives you a better understanding of your financial situation and what you can afford. It makes hunting for a home a little easier and can sometimes be essential even to be shown homes.
If you are serious about buying a home, pre-approval is an important stage in purchasing. Though it doesn’t guarantee you will be approved for the loan when you’ve found a house, it goes a long way.
Hopefully, you have enjoyed this guide on how to get a pre-approval when buying your first house.
Get started with pre-approval.
Article last modified on March 30, 2021. Published by Debt.com, LLC