Buying a home is one of the most significant financial decisions you’ll make in your life. Whether you’re a first-time homebuyer or a seasoned investor, getting mortgage preapproval is a crucial first step in the process. A mortgage preapproval not only gives you a realistic understanding of what you can afford but also strengthens your position in a competitive real estate market.
In this comprehensive guide, we’ll explain what mortgage preapproval is, how it works, why it’s important, and how to increase your chances of getting preapproved.
What is Mortgage Preapproval?
Mortgage preapproval is a written statement from a lender indicating that you qualify for a mortgage loan up to a certain amount, based on a preliminary review of your financial information. It gives you a clear picture of your homebuying budget and shows sellers that you are a serious and capable buyer.
A preapproval letter typically outlines:
- The maximum loan amount you qualify for
- The loan type (e.g., fixed-rate, adjustable-rate)
- The estimated interest rate
- The expiration date (usually 60 to 90 days)
It’s important to note that preapproval is not a final loan approval. Once you’ve selected a property and submitted a formal loan application, the lender will perform a more detailed underwriting process before issuing final approval.
Mortgage Preapproval vs. Prequalification
While the terms are often used interchangeably, prequalification and preapproval are not the same.
| Feature | Prequalification | Preapproval |
|---|---|---|
| Based on | Self-reported financial info | Verified documents and credit check |
| Accuracy | Rough estimate | More accurate |
| Credibility with Sellers | Low | High |
| Credit Check Required | No | Yes |
| Approval Letter | No | Yes |
Preapproval carries more weight in real estate transactions and gives you a clear advantage when making an offer.
Why is Mortgage Preapproval Important?
1. Sets a Realistic Budget
Knowing exactly how much you can borrow helps you shop within your price range, avoiding disappointment and wasted time.
2. Strengthens Your Offer
Sellers and agents view preapproved buyers as more reliable and prepared, which can give you a competitive edge in a hot market.
3. Speeds Up the Process
With much of the financial vetting already done, final approval and closing can be faster once you choose a home.
4. Helps Identify Issues Early
The preapproval process may uncover problems—like credit score issues or high debt-to-income ratios—that you can address before they impact your home purchase.
How to Get Preapproved for a Mortgage
The mortgage preapproval process typically involves several steps. Here’s what you need to do:
Step 1: Review Your Credit Report
Before applying, check your credit report and credit score. Most lenders require a score of 620 or higher, but a score of 740+ will help you get the best interest rates.
You can obtain free credit reports from:
- AnnualCreditReport.com
- Credit bureaus (Equifax, Experian, TransUnion)
If you find errors or discrepancies, address them before applying for preapproval.
Step 2: Gather Necessary Documents
Lenders require documentation to assess your financial stability and borrowing ability. Common documents include:
- Proof of income (pay stubs, W-2s, 1099s)
- Tax returns (last 2 years)
- Bank statements (last 2-3 months)
- Employment verification
- Identification (driver’s license, Social Security number)
- Debt and asset information (credit cards, car loans, retirement accounts)
Step 3: Choose a Lender
Research and compare mortgage lenders based on:
- Interest rates
- Customer reviews
- Loan options
- Fees and closing costs
- Preapproval process time
You can apply to multiple lenders without hurting your credit score if you do it within a 30-day window. This is known as rate shopping.
Step 4: Submit a Preapproval Application
Submit your financial documentation and consent to a hard credit inquiry, which may lower your score slightly (usually by a few points). The lender will evaluate your:
- Credit score
- Debt-to-income (DTI) ratio
- Employment and income stability
- Down payment savings
- Overall financial profile
Step 5: Receive Your Preapproval Letter
If you qualify, the lender will issue a preapproval letter, stating the loan amount you’re eligible for. The letter is typically valid for 60 to 90 days.
What Do Lenders Look for in a Mortgage Preapproval?
1. Credit Score
A higher score improves your chances of approval and qualifies you for better interest rates.
2. Debt-to-Income Ratio
This ratio compares your monthly debt payments to your gross monthly income. Lenders usually prefer a DTI of 43% or less.
3. Income and Employment
Stable and verifiable income increases lender confidence. Self-employed applicants may need to provide additional documents.
4. Assets and Down Payment
Lenders will check that you have enough savings to cover the down payment, closing costs, and reserves.
How Much Mortgage Can You Afford?
Your preapproval amount isn’t necessarily the amount you should borrow. Use the 28/36 rule as a guide:
- Spend no more than 28% of your gross monthly income on housing costs.
- Keep total debt payments below 36% of your income.
Use online mortgage calculators to estimate monthly payments, including:
- Principal and interest
- Property taxes
- Homeowners insurance
- Private Mortgage Insurance (PMI), if applicable
Tips to Increase Your Chances of Preapproval
- Improve your credit score by paying bills on time and reducing credit card balances.
- Pay down existing debt to lower your DTI ratio.
- Save for a higher down payment to reduce lender risk.
- Avoid big financial changes like switching jobs or financing large purchases before applying.
- Be honest about your finances—lenders will verify your information.
What Happens After Preapproval?
Once preapproved:
- Start house hunting within your preapproved price range.
- Make an offer on a home and include your preapproval letter.
- Apply for final loan approval once your offer is accepted.
- Underwriting and appraisal process begins.
- Close on your new home once final approval is granted.
If your preapproval expires before you find a home, you can request an extension or submit updated documents to renew it.
Common Mistakes to Avoid
- Not checking your credit report beforehand
- Assuming preapproval guarantees final approval
- Failing to lock in interest rates when they’re low
- Changing jobs or income sources during the process
- Taking on new debt before closing
Conclusion
A mortgage preapproval is a critical step in your homebuying journey. It helps you understand your buying power, gives you an edge in competitive markets, and streamlines the closing process.
By preparing your finances, comparing lenders, and understanding the requirements, you can approach the homebuying process with confidence. Remember, a preapproval isn’t just a number—it’s your ticket to negotiating better, moving faster, and ultimately securing the home of your dreams.