Getting a preapproved mortgage can help to speed up the home buying process. It gives you a chance to discuss your loan options and budget with potential lenders, and it may give you an upper hand in a competitive market.
If you want to be ahead of the curve when buying a home, it’s important to know how to get preapproved for a mortgage and what happens during the process.
What is a mortgage preapproval?
A mortgage preapproval is a letter from a lender that states you are preapproved for a mortgage loan up to a specific amount. The process involves a lender evaluating your creditworthiness and financial picture to determine what kind of mortgage you qualify for. The approval letter usually includes the amount of money you’ll be able to borrow for a home, as well as the estimated interest rate for that loan.
Mortgage lenders typically look at your credit score, credit history, debt-to-income ratio and other financial factors to better assess your full financial situation. This is a more intense evaluation than a mortgage prequalification, which doesn’t require a hard credit check or verification of your finances. Mortgage preapproval can set you up with the best chance to buy the home you want because it tells you how much house you can get and shows sellers you are ready to move forward when you make an offer.
How to get a preapproved mortgage
The preapproval process involves filling out an application, agreeing to a credit check and providing various financial documents. Here’s what you should do to prepare for the process.
1. Know your credit score
Most lenders require a credit score of at least 620 to qualify for a mortgage, but a higher score can translate to a better mortgage rate. Aim for a score in the mid-700s or higher to position yourself for the best interest rate. It’s important to also note that some loan programs are more lenient with credit score minimums, such as VA loans, which don’t have a minimum (although the lending you obtain the loan from will) and FHA loans, which allow scores as low as 500. You may be able to access your credit score through your credit card company or bank, depending on their benefits and services. You can also use AnnualCreditReport.com to access a free copy of each credit report once every 12 months.
2. Dispute errors on your credit report and resolve any issues before applying
Carefully review each of your credit reports from the three major credit reporting bureaus: Experian, Equifax and TransUnion. Check to make sure all information is correct and updated. If you find any discrepancies, use the credit bureau’s online dispute process to resolve the issue. You can dispute errors such as incorrect late payments and inaccurate loan balances. However, you won’t be able to dispute delinquent accounts or other negative marks that are correct. Instead, you’ll need to work with the creditor directly to resolve the issue.
3. Find potential lenders
You have to apply with a lender to get preapproved. However, it shouldn’t just be any lender. The industry is competitive, so shop around and make a short list of reputable lenders that have the loan products and customer service you are looking for.
4. Gather your financial paperwork and other relevant documents
You’ll need to provide personal information on your income, assets and offer supporting documents as requested by your lender. This can include:
- A valid form of identification
- Social security number
- Two years of your most recent tax forms that are related to income (ex: W-2, 1099)
- Your most recent three months of bank statements
- Your most recent 30 days of pay stubs
- Any documents that show additional sources of income
- Statements showing investment income
- Gather all of your documents so you are ready to submit them to the various lenders.
5. Undergo the preapproval process
Once you are ready with your accurate and optimized credit report, paperwork and a shortlist of lenders, contact the lenders to let them know you want to start the process to get preapproved. They will guide you on what is needed to complete the process and what you can expect.
After the preapproval process, you will either be approved and will receive your letter, or will be denied and won’t. If approved, you can share the loan amount with your real estate agent so they know which homes to show you. You can also use it when making an offer on a house to give your bid extra clout.
How long does the mortgage preapproval process take?
While the preapproval process can vary from lender to the next, it is typically completed in one to three days. The lender reviews your full financial picture, and if you are approved it will provide you with the exact type and loan amount it can provide. This information will be documented in a preapproval letter, which will typically remain valid for 60 to 90 days.
If you have a low credit score or other financial barriers in your lending history — like a previous foreclosure — the process may be more drawn out. You can speed up the preapproval process by having all of your documents readily available and resolving any potential financial issues ahead of time.
Why is it important to get preapproved for a mortgage?
It’s easy to get caught up in the excitement of buying a home, which can lead to considering homes well outside of your budget. A preapproved mortgage loan can give you an educated starting point for determining which houses you can afford, saving you time and energy in the process.
A preapproval can also boost your position with sellers since it shows you can back your offer up with secured funding. It signifies that you’re serious about purchasing a home and aren’t just casually looking.
You may also want to get preapproved with a short list of lenders to find out which offers you the best deal. As long as you complete all of your applications within 45 days the hard inquiries made by lenders will only count as one on your credit report because lenders will know you’re shopping for the best rate on a home.
How to improve your chances for a preapproved mortgage
You can increase your chances of getting preapproved by tackling your finances before you’re ready to purchase a home. Take steps to raise your credit score by paying your bills on time every month and paying down large outstanding balances. Avoid making other large purchases — like buying a car — and start adjusting your budget to increase your savings for your down payment and closing costs. Consider making a large down payment, which can reduce the loan-to-value ratio and improve your standing with the lender.
It can be tough to find out you don’t qualify for a preapproved mortgage, but it doesn’t mean you won’t be eligible in the future. If this happens, start taking action to address the issues that prevented you from getting a preapproval the first time and improve your finances overall. Also, make sure to shop around, since each mortgage lender has its own qualification criteria.
How to get preapproved for a mortgage if you’re self-employed
It can be more challenging to secure a mortgage if you’re self-employed, as income from a self-employed person can be harder to verify, but there are steps you can take to improve your odds.
You may benefit from altering your business practices, such as:
- Registering and licensing your business to show that your work is legit
- Maintaining separate personal and business accounts
- Keeping thorough records to track income and expenses
- Paying yourself with a W-2 wage rather than making withdrawals as an owner
You can also consider making a larger down payment or choosing a local credit union that you already have a relationship with for financing.
The bottom line
A pre-approved mortgage can help you stand out in the real estate market and give you an accurate price range before you start shopping. By collecting required documents ahead of time — and taking steps to improve your financial standing before applying — you can speed up the preapproval process.