Key takeaways
- A mortgage preapproval is a statement of how much money a lender is willing to let you borrow to pay for a home.
- There are several important steps in the mortgage preapproval process, such as shopping around for lenders and gathering financial documents.
- Getting preapproved makes it more likely your offer on a home will be taken seriously.
Getting preapproved for a mortgage is an important step in the homebuying process: It gives you a solid idea of how much you can borrow, and it shows sellers that you’re serious about buying a home. In locations where the housing market is competitive, a preapproval could also set you apart from other buyers as you’re bidding on homes.
Here’s a step-by-step guide to getting preapproved for a home loan.
What is mortgage preapproval?
A mortgage preapproval is a statement of how much a lender will let you borrow to buy a home. This is based on the lender’s review of your financial profile, including your income, assets in your savings and investment accounts, your debts and the results of a hard credit inquiry.
Why do you need a mortgage preapproval?
Whether it’s a buyer’s or seller’s market, getting preapproved is essential for buying a home. Here’s what a preapproval does:
- Focuses your home search: Preapproval helps you understand your likelihood of being approved for a home loan and how much you may be eligible to buy. This means you can limit your home search to properties within your budget.
- Gives you credibility with sellers: Your preapproval makes your offer more compelling because it shows sellers you’re a serious buyer who’s likely to qualify for financing.
- Helps you rate shop: Getting preapproved with multiple lenders makes it easier to find the lowest mortgage rate — or bargain for it — which could save you thousands over the loan’s term.
How to get preapproved for a home loan
1. Check your credit
During your preapprovals, lenders will run hard credit checks. Your credit score is important because it helps lenders determine the risk of lending to you.
Consider checking your credit reports before your lenders do, in case there are errors that could impact your ability to get preapproved and obtain a favorable mortgage rate. Under federal law, you’re entitled to free copies of your credit reports from each credit bureau once per week. These can be obtained at AnnualCreditReport.com. If you spot any mistakes or missing information on your credit reports, file a dispute with the credit bureau and the creditor.
It’s also smart to review your credit score (which isn’t typically included on the reports). Your score is calculated from the information in your credit reports, like your payment history, credit limits and account statuses.
It’s important to check your credit score before getting preapproved for a mortgage, because lenders often have minimum credit score requirements for their loans.
While each lender sets its own credit requirements, minimum credit scores also vary by loan type:
If your score falls below these requirements, you may need to focus on improving it before buying a house. There are several ways to do this, including:
- Paying down credit card balances
- Pay debts on time
- Not opening new lines of credit
- Keeping older credit lines open after paying them off
2. Calculate your debt-to-income ratio
Before you get preapproved, it’s a good idea to check your debt-to-income (DTI) ratio as well. Your DTI ratio is one of the biggest factors lenders consider when you apply for a mortgage. You can calculate this figure by adding up your monthly debt payments — including your prospective mortgage — then dividing that total by your gross monthly income, and multiplying the result by 100.
DTI example
Let’s say your prospective monthly mortgage payment is $2,000, and you also pay $1,000 per month toward your car and student loans. Your pre-tax monthly income is $9,000.
($2,000 + $1,000) / $9,000 x 100 = 33.3333%
Most lenders require a DTI ratio below 50% to qualify for a mortgage, but the exact limit varies by lender. With a DTI ratio of 36% or less, you’ll typically get the most favorable loan terms and interest rate.
If your DTI ratio isn’t ideal, consider working on it before you apply. You can do this by paying off existing debt, making extra debt payments each month or increasing your income. You should also avoid opening any new credit accounts or taking on any new loans.
3. Gather personal and financial documents
You’ll need to supply documentation for a mortgage preapproval, including information about your income, assets and debts. These documents typically include the following:
- Pay stubs from at least the past 30 days
- W-2s from the past two years
- Proof of any other income sources, such as bonuses or commissions, child support or rental revenue
- Account statements — including checking, CDs and retirement savings — from at least the past two months
- Documents detailing any loans you currently have
- Letters explaining any new loans you’ve taken out recently
- Gift letters from anyone giving you money to use for a down payment
- Court records, if you’re recently divorced or dealt with something like bankruptcy or foreclosure
- Contact info for your landlords if the lender wants to verify payment
- ID — such as a driver’s license or passport — so lenders can verify your identity and citizenship. Foreign nationals can get financing, but it’s much more complicated.
Self-employed professionals might need to undergo a more involved process. For example, a lender may review your business records, such as profit-and-loss statements.
Lenders typically ask for the same types of documents, so it’s best to have them all organized before you begin applying.
4. Choose a few mortgage lenders
To get the best rates and fees, it’s important to shop around. At this stage, you’ll be selecting lenders — ideally three or more — with whom you’ll apply for preapproval. You can typically see rate quotes and review loan options online to get a sense of which lenders might be a good fit. You should also read lender reviews to learn about customers’ experiences.
Applying for multiple preapprovals will allow you to compare mortgage offers later.
5. Get preapproved
In many cases, you can get preapproved for a mortgage by submitting an online application. You may also be able to do it over the phone, and if you prefer, you can usually meet with a lender at a local bank branch.
During preapproval, lenders will verify the personal and financial information you submit and use it to decide whether you qualify for a mortgage and, if so, how much to lend you.
If you do receive preapproval, you’ll receive a letter stating the amount you’re approved to borrow and the expiration date of your preapproval. You’ll also see the loan type and terms in this letter.
How does a preapproval impact my credit?
During preapproval, lenders will conduct a hard credit inquiry, or “pull,” of your credit. They do this to assess your credit utilization ratio, or how close the outstanding balances on all your credit cards are to your total credit limits. The lower your credit utilization ratio, the better your chances of getting preapproved for a mortgage.
The hard pull will reduce your credit score by a few points, but that minor impact decreases over time until it falls off your credit report after two years. The upside is that multiple hard pulls for mortgage preapproval can be grouped into a single entry on your credit history. If you want to compare offers, try to get preapproved by multiple lenders within 45 days to limit the impact on your credit score.
Mortgage preapproval vs. prequalification
Preapproval and prequalification sound similar, but they differ in crucial ways.
- Prequalification: Prequalifying for a mortgage gives you a rough idea of the amount of financing you might be able to get. However, prequalifications are typically based on self-reported information that the lender doesn’t verify. There’s no commitment from the lender, and prequalifications aren’t very compelling to sellers.
- Preapproval: With a preapproval, the lender verifies your financial information and provisionally agrees to lend you a certain amount. A preapproval shows sellers that you can afford the purchase.
Mortgage preapproval vs. mortgage final approval
Just as prequalification and preapproval are different, preapproval differs from actually applying for a mortgage, too. While you’re very likely to receive a mortgage if you’re preapproved, it’s also possible to be preapproved and have your official mortgage application rejected.
- Preapproval: Preapproval doesn’t guarantee you a loan; it’s just one step toward approval. The lender gives your finances a brief overview and, based on that, agrees in principle to loan you funds.
- Final approval: The lender authorizes your application to borrow funds to buy a particular property. It thoroughly reviews your finances and pending purchase, including verifying employment and income, and evaluating the home. If something unexpected comes back during this underwriting review — or if your financial situation changes — you might not qualify for a loan or find the details of your loan have changed.
What is conditional approval?
If you receive conditional approval after applying for a mortgage, it means the lender is likely to grant final approval — provided you meet certain conditions. Often, this means providing additional documents (like bank statements or a gift letter), employment verification, proof of homeowners insurance or a home appraisal report.
How far in advance should you get preapproved for a mortgage?
The best time to get a mortgage preapproval is before you start looking for a home. If you find a home you love but don’t have a preapproval in hand, you likely won’t have time to get preapproved before you need to make an offer — and many sellers won’t even consider offers from buyers who aren’t preapproved.
Many mortgage preapprovals are valid for 90 days, though some lenders will only authorize a 30- or 60-day preapproval. If your preapproval expires, getting it renewed can be as simple as your lender rechecking your credit and finances to ensure there have been no major changes to your situation. Just keep in mind that this might count as another hard pull against your credit, dropping your score by a few points.
How long does it take to get preapproved for a mortgage?
You may receive preapproval in one business day or less. But depending on your mortgage lender and your eligibility, it could take a few days or even a week to receive it. And if you have an unusual financial situation, it can take even longer than that.
What to do if you’re denied for mortgage preapproval
If your mortgage preapproval is denied, there are a few steps you can take:
- Ask the lender why you were denied: If it’s an issue you can remedy, like an error on your credit report, you can address that right away and seek preapproval again once it’s resolved.
- Improve your credit score: If your credit score is too low or other financial roadblocks prevent you from being preapproved, you can work to improve those areas, too. Raise your credit score by making payments on time and paying down — or paying off — debt or lower your debt ratio by finding a way to increase your income.
- Apply through a different lender: Lenders have different thresholds for qualification, so another lender may approve you, even with the same financials. If you’re an existing account holder with a bank or a member of a credit union, it might be more willing to work with you on a preapproval.
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