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Why a mortgage preapproval matters so much in 2024
With mortgage rates so hard to predict, understanding how much house you can afford to buy in a difficult real estate market is critical. That's why getting a mortgage preapproval before you begin house hunting is so necessary these days.
Understanding how much money a mortgage lender will let you borrow, and at what interest rate, will give you the exact information you need to shop for houses more confidently and successfully.
Here's how to get preapproved for a mortgage.
Read more: How to buy a house in 2024
What is mortgage preapproval?
A mortgage preapproval is a notch below final loan approval. Your finances are vetted to the extent that a lender feels comfortable estimating just how much they might loan you to buy a home — and at what interest rate.
A preapproval will require a credit check and some income and debt documentation. There is usually no charge for a preapproval from a lender.
Tip: Remember, a mortgage preapproval is not a firm commitment by a lender to offer you a loan. You also aren't under any obligation to take out a loan with the lender issuing the preapproval. But you'll have a good idea of your home loan options, what price range of home you'll likely qualify for and how much your monthly payment might be.
Read more: 5 strategies to get the lowest mortgage rates in 2024
Mortgage prequalification vs. preapproval
Some lenders will offer a quick mortgage prequalification process online. This is usually not the same as a preapproval. A prequal is a lightweight lift, requiring little paperwork and usually no credit check. It's a rough idea of where you stand financially in the home-buying process — really just an estimate of your creditworthiness.
A mortgage preapproval is a much better gauge of your home-buying qualifications. A preapproval letter is a golden ticket to house hunting because real estate agents and home sellers will know you’re a serious buyer.
Tip: You really only need to get preapproved by one lender to get your house hunting underway. Once you have a purchase contract for a home in hand, you'll want to apply to a number of lenders to receive loan offers to compare.
How to get preapproved for a mortgage
If you're a first-time home buyer, getting preapproved for a mortgage is a good test run for actually getting a home loan. You'll be providing much of the same information as you will with a mortgage application and learning just how the mortgage underwriting process works.
Factors impacting mortgage preapproval, and final loan approval for that matter, include:
Your debt-to-income ratio. That's how much money you owe divided by how much money you make.
Your income and employment history.
The loan-to-value ratio. This is where the amount of your down payment comes into play.
Your credit score and payment history.
Read more: The best mortgages for first-time home buyers
At this point, it's a good time to check your financial health so that you don't face any eligibility surprises.
Check your credit history at annualcreditreport.com and get your free FICO score from two or three credit card or financial services providers.
Choose a mortgage lender or two to talk to and then settle on the one where you will seek the preapproval.
Gather the requested documentation. You’ll likely need pay stubs to verify your monthly income, tax returns, bank statements, and other financial documents. If you are self-employed, it’s likely you may have to provide additional financial information.
Answer the mortgage preapproval profile questions.
If approved, be sure to obtain a mortgage preapproval letter.
Tip: Preapprovals don't last forever. They're typically good between 60 to 90 days. Since that's quite a gap, be sure to ask your lender the expiration date of their preapproval.
Read more: How to get a mortgage
What to do if you're declined a preapproval
Don't panic. Talk to the loan officer, review your credit report with them, and ask for specific areas of your financial situation that need to be improved. If you need to reduce debt, ask by how much. If you're aiming to qualify for too much house, ask what loan amount you might soon be best qualified for.
The lender will be happy to walk you through the steps you need to take to get on the path to preapproval.
Read more: The best mortgage lenders for first-time home buyers
What to do if you're preapproved for a mortgage
Shop for a home in your preapproved price range — preferably less. Protect your financial standing by avoiding additional monthly debt, changing jobs, or doing anything that might jeopardize your final loan approval.
You want your credit score and credit history to remain solid, or even improve a bit, before you sign a purchase contract, submit a mortgage application, and get loan offers from lenders.