Everything You Need to Know About Preapproval
If you’re planning on purchasing a home using a loan, you’ll first need a mortgage preapproval.
Preapproval is preliminary authorization on a home loan, letting you know how much you can afford based on your current financial situation. Getting preapproved for a loan is not only helpful when you’re shopping around, it’s also a good sign to sellers that you’re a serious and reliable buyer.
With preapproval being such an important factor when purchasing a home, it’s important to know the ins and out of the process.
What is Preapproval
Mortgage preapproval is the process where lenders determine what types of loans you qualify for, how much you can borrow, and at what rate. Lenders will typically require you complete a loan application and will also look at your credit score, income and financial stability, debt-to-income ratio, and down payment. Once approved, lenders will provide you with a letter of preapproval detailing what you’ve been authorized for.
Preapproval vs. Prequalification
While the two are similar and often used interchangeably, mortgage preapproval and prequalification are two different things. Preapproval is a process that entails completing an application, providing financial documents, and a hard credit pull. Prequalification, on the other hand, is a much simpler undertaking that requires little or no financial documents be provided nor a credit pull; it’s more of a discussion than a process, and as such, doesn’t hold nearly as much weight when purchasing a home.
The Preapproval Process
Understanding What Factors Lenders Consider
When assessing you as a potential borrower, lenders will scrutinize your financial history looking at your credit score, income and financial stability, debts compared to your income, savings, assets, and the amount you’re able to put down on a home.
Collecting Your Documents & Applying
With preapproval, lenders won’t take you on just your word. You’ll need to provide financial documents in order for lenders to verify what you’re saying. Documents you’ll want to start pulling together include:
- Identification
- Social Security number
- Bank statements
- Pay stubs
- W-2 statements
- Tax returns
When applying, you should also be prepared to fill out an actual loan application form as well as a hard credit pull.
How Long Does Preapproval Take
Preapproval can take anywhere from 7-10 business days on average, so collecting any documents beforehand can help to speed along the process.
Getting a Letter of Preapproval
Once you’ve been approved, lenders will then provide you with a letter of preapproval detailing loan programs you qualify for, how much you’ve been approved for, and at what rate. This letter can then be shown to sellers to let them know you’re a qualified and trustworthy option.
Shop Around With Lenders
Like with any purchase, it’s important to try to get the best deal when shopping for a home loan. As such, it’s recommended you get approved by and receive preapproval letters from at least three different lenders. Each lender will provide you with a different proposal, so you’re then able to compare each option and choose the one that’s right for you.
It’s also important to note that when your credit is pulled by one lender, subsequent pulls from other lenders in the same time period won’t affect your credit, so there’s no downside to shopping around!
Knowing When to Get Preapproved
You’ll want to get preapproved as soon as you plan on starting your home buying journey. It not only helps you as a buyer to understand what you can afford; it also helps you to stand as a serious buyer to sellers.
How Long Does Preapproval Last
Depending on the lender, your letter of preapproval lasts anywhere from 60-90 days. After that, you’ll have to provide updated financial documents and have your credit pulled again, so while you’ll want to get preapproved when you plan on entering the market, you don’t want to get preapproved too early and have to start the process all over again.
What to do if You’re Denied Preapproval
First, you’ll want to find out why you were denied in the first place, so you have a good idea what to fix. Preapproval is usually denied due to a high debt-to-income ratio or low credit score.
If your DTI ratio is too high, consider paying off high balance installment loans, asking someone to cosign on the loan with you, or providing a bigger down payment. If it’s your credit score, try paying off any credit balances or again adding a cosigner.
Why Preapproval Matters
As mentioned, preapproval is not just beneficial to you as a home buyer as it gives you an idea as to what you can afford, it’s also important to sellers who want to know they’re engaging with a serious buyer.
Either way, preapproval is a crucial step in the home buying process and should be treated as such. Hopefully, you now know a bit more about the process and what it entails, so you can move forward with greater ease.
If you have any additional questions, please don’t hesitate to reach out! We offer no strings attached consultations and are more than happy to help out!
