Many future homeowners begin the buying process by connecting with a real estate agent and searching for homes.
But there’s an important step that should come before this part: mortgage preapproval.
What's in this article?
Why should you get preapproved before you even find a house? Getting preapproved will tell you how much you can afford, and prove you’re a serious buyer.
Here are five things you need to know about mortgage preapproval, including how to get preapproved for a mortgage and what you can expect.
1. What is a mortgage preapproval?
The mortgage preapproval process involves a lender evaluating a potential borrower to determine whether they qualify for a home loan.
Mortgage lenders will look at several factors, including your income and credit score, to decide which loan types may be right for you, your interest rate, and potential loan amount.
A mortgage preapproval typically is a statement in the form of a letter, which you can take to your real estate agent to show how much home you can afford.
Preapproval is conditional, meaning it doesn’t guarantee final approval. It’s based on the information you provide when you apply, and can change if your finances change before approval.
Preapproval vs. pre qualification and final approval
Preapproval is a step between mortgage prequalification and approval.
Prequalification is a less-accurate review of your financial situation because it doesn’t include a deep dive into your credit report.
A borrower also doesn’t have to provide documentation to prove their finances with prequalification, so it’s just an estimate.
With preapproval, you will have to provide documentation to prove your finances, and the lender will run a credit check.
A loan officer will perform a full approval once you find your home, and involves not only a final review of your finances, but an appraisal and approval of certain property details.
Final approval is not guaranteed
Getting preapproved does not guarantee final approval.
You will need to maintain your financial situation from preapproval to final closing on the home, or you may be denied final approval.
You can maintain your good standing by avoiding the following:
- Changing your job
- Making major purchases
- Using up your savings
- Making large deposits into your accounts
If any of these factors are unavoidable, you should contact your lender as soon as you can to make them aware of the changes and ask how this might affect your mortgage process.
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2. What do you need to get preapproved?
The preapproval process generally consists of three main steps:
- Gather your financial documentation
- Complete application
- Receive preapproval
Let’s dig into these steps to determine what’s required of you at each stage.
Gather your financial documentation
Before you apply for preapproval, you should have all your documentation ready.
Your lender needs to get a full picture of your finances, and they will want proof of the following:
- Income
- Employment
- Assets
- Credit history
- Debt-to-income ratio (DTI)
Your lender will calculate your DTI by dividing your monthly debts from your gross monthly income.
This number, expressed as a percentage, shows them how much of your monthly income goes toward paying your debt.
To prove this information, you will need to supply the following documentation to your lender:
- Identification, such as your driver’s license
- Previous 2 years of W-2 or 1099 statements
- Previous 2 years of tax returns
- Pay stubs
- Bank statements
- Asset or retirement statements
The information you need to provide will vary by lender, so be sure to ask what you need to prepare. This will help speed up the application process.
Complete application
Loan officers usually allow you to complete the application online or over the phone.
The application form is called the 1003, and will require you to plug in the information you gathered in the first step.
Receive preapproval
Once you submit your application, your lender will pull your credit report.
Sometimes they will ask for more documentation or information to prove your statements, based on your unique situation.
Once they have everything they need, they can supply you with your preapproval.
This statement is non-binding, so many people choose to get pre-approval from multiple mortgage lenders to compare offers.
3. When should you get a preapproval?
Homeowner hopefuls should get preapproved before they start the home search.
Providing a mortgage preapproval letter to your real estate agent allows them to focus on showing you which homes are within your budget, and it helps you understand how much home you can afford so you can properly budget.
Plus, it shows both agents and sellers that you’re a serious buyer who has already started the lending process.
The benefits of early preapproval
Some people choose to get preapproved several months before they start searching, because finding out how much home they can afford based on their finances can reveal which areas need some work.
For example, if your credit score is low and you don’t qualify for as much as you’d hoped, or the loan program you were hoping for, you can work on improving your score and try again.
However, if you’re ready to purchase a home you don’t want to wait too long to get preapproved, because it does have an expiration.
4. How long does it take to get preapproved for a mortgage?
It generally takes a few days to get preapproved, depending on your lender and whether they require any additional documentation.
To keep things moving along, be sure to have all documentation ready when you apply, and quickly respond to any requests for additional documentation if needed.
5. How long does a preapproval last?
Preapprovals typically expire within 60 to 90 days, so keep this date in mind as you search.
Finding the right home can sometimes take a while, so if you are nearing your expiration date, ask your lender how to renew your preapproval.
Usually, renewal involves supplying your most recent financial information. Your lender can update this information and provide you with a new letter, assuming nothing has changed significantly.
Get preapproved with Compass Mortgage
If you’re ready to apply, or have questions about how to get preapproved for a mortgage, the loan officers at Compass Mortgage want to help you make an informed decision about your options.
Better yet, talk to one of our loan officers about Get Committed®, our unique program for a loan commitment which goes beyond preapproval to help you buy the home of your dreams.
The Compass Mortgage team will go above and beyond to help you reach all your homeownership goals. We believe in treating everyone with respect, and handling every loan with the care it deserves.
Reach out to us today to tell us what you’re looking for, so we can offer our support.