How Does Mortgage Preapproval Work?

A mortgage preapproval helps you determine how much you can spend on a home, based on your finances and lender guidelines. Many lenders offer online preapproval, and in many cases you can be approved within a day. We’ll cover how and when to get preapproved — so that when you find a home you love, you’re ready to make a smart and effective offer.

What is a mortgage preapproval?

A mortgage preapproval is written verification from a mortgage lender, which states that you qualify to borrow a specific amount of money for a home purchase. The amount you’re approved for is based on a review of your credit history, credit scores, income, debt and assets.

The “pre” in front of “approval” is short for preliminary, because a preapproval is typically based only on information you’ve provided in an application. The lender will still have to validate all of your information to issue a final approval before you close.

Once you find a home, you’ll also need to get a home appraisal to confirm that the home’s value supports the sales price. Most lenders won’t give you a mortgage for more than a home is worth, even if you’re willing to buy it at that price.

The difference between mortgage preapproval and prequalification

Mortgage preapproval and mortgage prequalification may often be used interchangeably, but there are important differences between the two. Ultimately, prequalification is an optional step that can help you fine tune your budget, while preapproval is an essential part of your journey to getting mortgage financing.

• Based on your word about your credit scores, income, debt and the funds you have available for a down payment and closing costs
• No financial documents required
• No credit report required
• Won’t affect your credit score
• Gives you a rough estimate of what you can borrow
• Provides approximate interest rates

• Based on documents — like pay stubs, W-2s and bank statements — that confirm your financial situation
• Credit report required
• Can temporarily affect your credit score
• Gives you a more accurate loan amount
• Interest rates can be locked in

Mortgage preapproval vs. final loan approval

Once you’ve been preapproved, you can shop for homes and put in offers — but when you find a house you want to put under contract, you’ll have to get that approval finalized.

To finalize your approval, lenders typically:

• Go through yourloan application with a fine-toothed comb to make sure all the details are accurate and can be confirmed with documentation.
• Order ahome inspection to make sure the home’s components are in good working order and meet the loan program’s requirements.
• Hire a home appraiser to verify the home’s value.
• Order a title report to make sure your title is clear of liens or issues with past owners.

If all of the above check out, your loan can be cleared for closing.

How to get preapproved for a mortgage

1. Gather your documents

You’ll typically need to provide:

• Your most recent pay stubs
• Your W-2s or tax returns for the last two years
• Bank or asset statements covering the last two months
• Every address you’ve lived at in the last two years
• The address and contact information of every employer you’ve had in the last two years

You may need additional documents if your finances involve other factors like self-employment, divorce or rental income.

2. Spruce up your credit

How you’ve managed credit in the past carries a huge amount of weight when you’re applying for a mortgage. You can take simple steps to improve your credit in the months or weeks before applying for a loan, like keeping your credit utilization ratio as low as possible. You should also review your credit report and dispute any errors you find.

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3. Fill out an application

Many lenders have online applications, and you might hear back within minutes, hours or days depending on the lender. If all goes well, you’ll receive a mortgage preapproval letter you can submit with any home purchase offers you make.

Factors lenders use to preapprove you for a mortgage

• Credit score. Your credit score can make or break a mortgage preapproval. Every loan program comes with minimum mortgage requirements, so make sure you’ve chosen a program with guidelines that work with your credit score.
• Debt-to-income ratio. Your debt-to-income (DTI) ratio is as important as your credit score. Lenders divide your total monthly debt payments by your monthly pretax income and prefer that the result is no more than 43%. Some programs may allow a DTI ratio up to 50% with high credit scores or extra mortgage reserves.
• Down payment and closing costs funds. Most loan programs require a down payment of at least 3%. You’ll also need to budget 2% to 6% of your loan amount to pay for closing costs. The lender will verify where these funds come from, which may include:
  • Money you’ve had in your checking or savings account
  • Business assets
  • Stocks, stock options, mutual funds and bonds
  • Gift funds received from a relative, nonprofit or employer
  • Funds received from a 401(k) loan
  • Borrowed funds from a loan secured by assets like cars, houses, stocks or bonds

  What if I’m denied for a mortgage preapproval?

  Two common reasons for a home loan denial are low credit scores or high DTI ratios. Once you’ve learned the reason for the loan denial, there are three things you can do:

  1. Reduce your DTI ratio

  Your DTI ratio will drop if you reduce your debt or increase your income. Quick ways to do this could include paying off credit cards or asking a relative to cosign on the loan with you.

  2. Improve your credit score

  Many mortgage lenders offer credit repair options that can help you rebuild your credit.

  3. Try an alternative mortgage approval option

  If you’re struggling to qualify for conventional and government-backed loans, nonqualified mortgages may better fit your needs. For instance, if you don’t have the income verification documents most lenders want to see, you might be able to find a non-QM lender who can verify your income using bank statements alone. Non-QM loans can also allow you to sidestep the waiting periods most lenders insist on after a bankruptcy or foreclosure.

  Frequently asked questions

  How long does it take to get preapproved for a mortgage?

  You could be preapproved in one day, or you may have to wait up to a week. The exact timeline depends on your lender and whether you’re able to quickly give them any missing information or track down extra documentation.

  How long does a preapproval for a mortgage last?

  A mortgage preapproval can last anywhere from 30 to 60 or 90 days, depending on the lender.

  Why is it important to get preapproved for a mortgage?

  First and foremost, a mortgage preapproval tells you how much you can afford to spend on a house. It also gets a large chunk of the mortgage approval process out of the way — then, when you find a house you love, you can make a quick offer that the seller is likely to take seriously.

  How will a preapproval affect my credit?

  The credit inquiry involved in applying for a mortgage preapproval (also known as a “hard pull”) may have an effect on your credit score, but that impact should be small and relatively brief. And, in some cases, credit inquiries from mortgage applications won’t bring down your score at all.