Mortgages: Should I Get Preapproved?
Point of Interest
Mortgage preapproval, which is different from prequalification, should be the first stop for homebuyers who want to enter the market. Getting preapproved for a loan will give you maximum flexibility to negotiate and buy a home.
Buying a new home boils down to two main steps for most people — finding the right home and getting funding. Thanks to mortgage preapproval, you don’t have to wait until after you find the right home to get approved for your loan. If you don’t get preapproved for a loan, you run the risk of losing out on the home you want if someone more prepared swoops in and makes a competitive offer. Knowing how to get preapproved and what the process entails is a basic requirement of smart shopping.
What is a preapproval?
It wasn’t unusual at one point in recent history for homebuyers to shop for a home and then look to get funding arranged to buy the home they want. Mortgage preapproval takes that process and flips it: you get preapproved for funding first so that when you do find the right home, you are ready to buy right away, with no unnecessary delays.
During the preapproval process, the lender will run a credit check and income verification. Once the process is complete, the lender will prepare a letter that says you are qualified for up to a certain sized loan. Generally, the preapproval is valid for between 30 to 90 days.
By going through the basic approval process before you start shopping, you can offer a preapproval letter from your lender to the seller to make your offer stronger. The preapproval letter gives you a tangible asset you can show to the owner of the home you want to buy. The letter tells that homeowner that you have a very good chance of being approved by a lender for a loan large enough to buy their house.
This shows the homeowner that you’re a serious buyer who is prepared to move quickly on the purchase of the home. Without the mortgage preapproval in hand, the homeowner has no way to ensure that you’re a serious buyer with the financial means to buy their home.
Prequalification vs. preapproval
A mortgage preapproval is sometimes confused with a mortgage prequalification. Both prequalification and preapproval come from lenders. While they sound the same, it’s important to understand the differences.
Prequalification is a preliminary check by a lender that tells you roughly how much home you can afford. You’ll still provide the lender with your income and asset information. However, the lender isn’t going to go through the process of verifying any of the information. The lender will let you know what you can afford if all of the information you provided checks out to be accurate. While this is helpful in giving you an idea of what price range you can shop for, it’s not a formal loan offer.
A prequalification is not as strong of a document as a preapproval to show the homeowner that you’re in a financial position to buy their home. If the homeowner has to choose between a buyer with a solid chance of approval via a preapproval letter and someone who has just been prequalified for a loan — chances are they’re going to choose the preapproval.
How do I get preapproved for a mortgage?
- Gather the necessary documents to get your mortgage preapproval. You’ll need income statements and verification documents, asset and bank statements, letters for any gifts you’re getting for the down payment and any additional documentation required. While these documents are standard requirements for most lenders, there may be other unique requests for more documents depending on your lender and loan type.
- Shop lenders to find a few you’re interested in working with. It’s best to check multiple lenders to find which might offer you the most favorable terms, the best chance of approval and the best rates. You can use the prequalification process during this step to get fast results and narrow down your search.
- Contact the lender(s) you want to work with and begin the preapproval process. You’ll then meet with each of the lenders you’re interested in working with. You’ll submit your documents, and the lender will verify the information you’ve provided and run a credit check. If you’re concerned about the multiple credit checks, hard credit pulls made during a fixed time period when shopping for a home or a car loan are generally grouped together on your credit report, which means the multiple pulls for preapproval from different lenders shouldn’t have a negative effect. It’s extremely important to inquire with multiple lenders for a purchase this large in order to find the best rates and terms.
- Get your mortgage preapproval letter. Once the verification process and credit check are complete, all that is left to do is to pick up your approval letter. From there, you can start shopping houses with the peace of mind that you’re on track for funding — but you’ll still have to go through the full approval process once you’ve found a home.
The final word
Mortgage preapproval might take longer than prequalification, but it gives you much more than just a ballpark of roughly what you can afford when buying a home. When you get preapproved, you can shop and negotiate with confidence knowing that you’re on the right track to be approved for a mortgage.