How to Get Preapproval for a Home Loan

Being preapproved for a mortgage loan is a great way to get valuable information about the loans you are qualified for. Preapproval is like a screening of your finances and loan qualifications to determine how much loan you can handle and what a lender will be willing to give you. It involves a thorough analysis of your financial history including your credit, debt, and income.

If you are successfully preapproved, you will receive a letter from the lender telling you the maximum amount that you can receive from a loan. It will also include important details about the loan including the interest rates, an estimated monthly payment, and any other relevant information. 

The given loan estimate along with having a preapproval letter have many benefits in the home buying process. That’s why preapproval is a helpful, but not usually required, step in the mortgage loan process. 

It’s important to realize that when you get a loan estimate from the preapproval stage, it is not guaranteed that this will be the exact loan that the lender will give you. It does provide a good outline for what to expect and the numbers are usually similar to the actual loan you may get later on. 

When you go in for a preapproval, feel free to learn more about your loan options and ask questions. Be sure to take advantage of your preapproval during the mortgage loan process.

What a Home Loan Preapproval Does 

The basic benefits of a preapproval are that it provides you with a letter and a loan estimate. The maximum amount that you are estimated to be able to receive is based on your loan qualifications. This means if you have a high credit score and income, the bank will estimate that you are qualified to have a higher loan amount. This also means that the worse your qualifications are, the lower your borrowing power will be. 

If you are preapproved, the letter proves that you are capable of affording a certain amount and gives you a good price range for house shopping. This means that when you search for a house, you won’t have to guess the amount that a loan will cover, only to later realize you are able to get a more or less expensive house than you thought. If you are looking for a home through a retailer, they may require you to have a preapproval letter to show that you are serious about purchasing a home with them and are able to afford it. 

Preapproval can also can also get you a mortgage loan faster because the bank has already reviewed and verified many of your documents. One more way to use preapproval to your advantage is by being preapproved by multiple lenders. Just make sure you do all preapproving within the same month. You can then compare the different preapprovals you received and see which lender will likely give you best deal, or the most borrowing power.

Preapproval vs Prequalification for Home Loans

Preapproval and prequalification have similar names and meanings. Some banks and lenders may even refer to both interchangeably. However, there are some differences between the two that make preapproval much more useful than prequalification. 

Both preapproval and prequalification are ways to estimate how much of a loan you will be able to receive. When you go to a lender to discuss your financial situation, they will review it to come up with a loan estimate. That’s where the similarities end. Prequalification is given at this stage, but preapproval goes a few steps past. The lender will actually require documents, verify them, and order a credit report. They make sure that every piece of information used is correct and true. This is what makes preapproval more official. It isn’t just granted on your word like prequalification. It takes official documents and reports.

As for costs, prequalifications are free. For preapprovals, although rare, you may have to pay a small amount of money to cover costs, like ordering the credit report.

How to Get Preapproved for a Mortgage Loan

The first step in being preapproved is to find a lender to do it. You can also be preapproved by multiple lenders if you want to shop around. You’ll need to choose a lender and make an appointment for preapproval. Before going to the appointment, you should prepare yourself and have all of the essential documents you need ready, including government issued identification, proof of income from the past two years, pay stubs from the last 30 days, debt statements, proof of assets, and more. Each of these categories may require multiple documents too. You should ask the lender that will be preapproving you for a specific list to make sure you have everything. 

If you will be applying for a mortgage with a spouse, then they will need their proof of income and identification too. Once you’ve chosen a lender, made a preapproval appointment, and have all the necessary documents, your lender will walk you through the rest. If you are prepared in every way, preapproval will go smoothly, but it is possible to be denied at this stage. Before even making an appointment, you need to make sure that you are ready for a loan financially and that you have good qualifications to back it.

The Home Loan Preapproval Process 

In order to start preapproval, you’ll need to bring all the necessary documents as specified by your lender to the appointment. Your lender will ask you to sign off for a credit check so they are allowed to pull your official credit report. You can discuss loan options or ask any questions at your appointment. You will be filling out an actual loan application and the lender will review your documents. 

After you have completed all the paperwork that your lender needs, you are done on your part and will have to wait for a response. There are certain rules and regulations in place to make sure that the preapproval process is fair to mortgage borrowers and lenders. So the borrowers aren’t kept waiting and potentially miss out on a house, a lender is required to give you a loan estimate or deny you within three business days of your preapproval appointment.

Also, your preapproval doesn’t last forever because the letter will eventually expire. The most common expiration is after 90 days. This is because your financial situation or credit could change enough in that time frame for the loan estimate to not apply anymore. 

The preapproval process is simple: Just attend the appointment, follow the lender’s instructions, and once approved, you have a loan estimate that will help you find a home in your price range. 

Who Should Get Preapproved

There are loads of benefits to preapproval, but you may be wondering if everyone should get preapproved for a mortgage loan. In general, the benefits of preapproval can be reaped by anyone looking for a home loan. Especially for first time home buyers, preapproval may be beneficial because it allows them to discuss a lot about loans with the lender. They may have a better understanding of the loan from discussing it, and they can make sure they have enough income to keep up with mortgage payments. 

If a homebuyer thought that they could afford a loan but actually would not be able to, the preapproval stage would uncover it for sure. However, if you already knew that you weren’t ready for a loan and that your loan qualifications were rough, there is no point in applying for preapproval so soon. Bad credit in particular can get you denied preapproval, along with not having enough income and a high debt to income ratio. If you need work in these areas, you can benefit from pre approval, but you’ll need to be ready before trying. Wait a few months to build up your qualifications and when you are sure to be preapproved, then go for it. 

Overall, preapproval can make the mortgage loan process easier for everyone. Just make sure that the chances of you actually being preapproved are high, because applying to be preapproved multiple times throughout the year will lower your credit score.

How Preapproval Affects Credit 

Applying for preapproval can negatively affect your credit score, but it is usually only a temporary hit, and not a large one. When a lender pulls your credit report, it's because they want to use your official credit score to determine how much money you are qualified to borrow from them. 

Whenever you apply for a new credit card or loan, a lender will request your credit score to make sure you aren’t a risk before being approved. This request is called a hard inquiry, and it will only drop your credit score by less than ten points. Eventually, it will disappear off your credit completely. 

However, multiple hard inquiries in a limited period of time are associated with risk and bankruptcy, and will more drastically affect your credit score. That’s why for mortgage purposes, as long as all hard inquiries are made within the same 30-day period, they are only counted as one. If you would like to get multiple preapprovals, it is safe to do as long as they are all done within a month. This rule was created so borrowers wouldn’t be forced to stick with the first preapproval offer. 

How Preapproval Affects Home Buying

Preapprovals give you confidence in your mortgage loan opportunities. They tell you how much you may be able to borrow, and help you learn what kind of loan options you have to work with. This makes you a more attractive home buyer. 

You know if you can afford a house and you are serious enough about buying to get preapproved. Getting preapproved can also help you find the best lender and rates. Preapprovals can provide you with many benefits in home buying and getting a home loan, so make sure to take advantage of them at the start of the mortgage process.

Unsure who to turn to to start the preapproval process? Brian the Lender is a mortgage lender who works with first-time home buyers as well as traditional homebuyers and veterans to match them with the best loan for their needs and lifestyle. Give him a call today to set up a meeting: 706-973-7933