Mortgage PreapprovalCASAPLORERTrusted & Transparent
A mortgage preapproval is an estimate by your mortgage lender of how much money you can borrow. You will typically get a mortgage preapproval before you start searching for a home. Here’s all you need to know about what is a mortgage preapproval, how to get a mortgage preapproval, and why you should get pre-approved for a mortgage.
What You Should Know
- A mortgage preapproval gives you an estimate of how much money a lender is willing to let you borrow at a certain interest rate
- Mortgage preapprovals require you to submit information such as your tax returns, pay stubs, Social Security number, and have your credit checked
- Having a mortgage preapproval letter can make a homebuyer’s offer more competitive, and it can also give a rough guide to the homebuyer’s budget
- Mortgage preapprovals typically last between 30 to 90 days, with your information needing to be reassessed to renew a preapproval
What is a Mortgage Preapproval?
A mortgage preapproval is when a mortgage lender looks at your financial information and qualifies you for a mortgage loan. Every lender evaluates a borrower’s financial situation and ability to pay off a mortgage before issuing one. Lenders analyze the borrower’s situation during the preapproval process too, and based on this information, they pre-approve a borrower for a certain mortgage amount with a certain interest rate. Being pre-approved for a mortgage shows that a mortgage lender is willing to let you borrow money for a home loan, and it also gives you an estimate of how much you can borrow.
This estimate is based on your income, debt, assets, and credit history. Lenders can provide a letter informing you of the type of mortgage you’re eligible for, the monthly mortgage payment that you can afford, and what mortgage rate you can receive.Mortgage borrowers should be aware that every lender has their own criteria to determine the amount they are willing to lend and the interest rate they are willing to set. Because of that, even if a lender pre-approves a borrower for the amount the borrower needs, they should shop around and see what lender can offer the best mortgage rate.
Mortgage preapprovals are used as a rough estimate to guide your home buying process. Online mortgage preapproval calculators can even estimate how much you can prequalify for. However, being preapproved for a mortgage isn’t the same as being approved for a mortgage. The maximum loan amount stated in your mortgage preapproval isn’t guaranteed, and being approved for a mortgage when it comes time to apply for one isn’t assured either. You will still need to be approved for a mortgage even if you have already gotten a mortgage preapproval. Mortgage preapprovals are usually free, however, some lenders may charge an application fee.
Pre-Approval vs. Pre-Qualification
Mortgage pre-qualification and preapproval both aim to give you an idea about how much you can afford and the terms of the mortgage. However, the slight difference between the two is the depth and the amount of information the lender requires from you.
Pre-Qualification: In a mortgage pre-qualification, the lender will only need very basic information to give you an estimate of how much you can afford. You won’t need to provide any documents, and you’ll only give basic numbers, such as your credit score, the price range of homes you are looking to buy, the amount of down payment you have saved, your monthly debt, and the type of loan you are looking to take (fixed, variable).
Pre-Approval: In a mortgage preapproval, you will need to provide all the required financial documents and information. You will need to also present supporting bank statements, tax returns, and pay stubs, along with all the information required in a pre-qualification. The lender will also run a credit check, and upon preapproval, provide you with an offer in writing with a mortgage rate.
Pre-Approval vs. Pre-Qualification
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Preapproval vs. Approval
While a mortgage preapproval is used during the home buying process to let you know how much you can borrow and at what mortgage rate, you will still need to be approved for a mortgage. Being preapproved for a mortgage does not automatically mean that you are approved. When it comes time to get a mortgage, your lender will check your financials and verify details about the property being purchased. This requires the lender to approve the home's condition, appraisal, and title, along with other factors considered during a mortgage preapproval, such as your income, credit, and debt.
- Home Appraisal: The lender will want to get an appraisal done to ensure that the appraised value is equal to or more than the listing price. This will show you that you are not paying more for the home as compared to its appraised value. Having a purchase price more than the appraised value may cause issues as lenders will not want to lend out more than the home is worth. That’s why contingencies can be used when making an offer on a home, such as an appraisal contingency, to allow you to renegotiate or to back out of the deal.
- Title: The lender will also have to check with the title company to make sure that it is a clear title and that there is no dispute regarding ownership. Lenders can require you to purchase title insurance to protect against issues with the title.
- Home Condition: Certain mortgage loans require that the home meet property standards. For example, the Department of Housing and Urban Development (HUD) has Minimum Property Requirements (MPR) and Minimum Property Standards (MPS) that are required for all FHA loans. According to HUD, these requirements and standards on the home’s condition ensure that the home is "safe, sound, and secure".
How to Get Preapproved for a Mortgage
How Does Mortgage Pre-Approval Work?
A preapproval letter is usually valid for 60 to 90 days. This means that the borrower who received a preapproval letter may be able to get a mortgage according to the terms outlined in the letter within 60 to 90 days. If a letter expires, the borrower may have to wait for some time for a lender to analyze their finances and approve them for a mortgage again. This is important when a borrower is planning to purchase a house that needs to be sold fast. For example, if a seller tries to short sell their property, a borrower with an expired preapproval letter may not be able to close the deal because the property needs to be sold fast.
On the other hand, a borrower may benefit from getting a preapproval letter early because it can provide some insights on the financial issues the borrower may have. Getting a preapproval letter early allows a borrower to work on their financial situation to increase their chances of approval later on. Additionally, if a borrower is able to improve their financial situation drastically, they may be able to lower their interest rate and save a lot of money down the road.
There are many criterias that may affect the outcome of the analysis a lender conducts on a borrower. Even though the lenders may provide different rates to the same borrower, they usually take into consideration similar metrics to conduct the analysis. These metrics usually include the following:
- Credit History
- Debt-to-Income (DTI) Ratio
- Income History
- Assets and Liabilities
- Employment History
Using these metrics, a lender assesses the risk level of a borrower and issues the preapproval letter.
When the lender collects all the documents needed to conduct the analysis, they have 3 business days to provide a loan estimate. This loan estimate is usually a 3-page document that outlines whether the borrower has been pre-approved or not. If they have been pre-approved, it also provides an estimated loan amount and an interest rate on the loan.
What documents are required for preapproval?
The preapproval process is similar to a mortgage application where the lender does a deep-dive into your finances and ability to repay a mortgage loan. When applying for a mortgage preapproval, you will need to submit various documents to confirm your identity and prove your income and assets. The following documents are required from you when applying for a mortgage preapproval:
- Drivers license or passport
- Social Security number (SSN)
- Last two pay stubs
- W-2 forms
- Income tax returns
- Bank statements
- Investment account, 401(k), and/or IRA statements
Do I Have to Provide My Social Security Number for a Mortgage Preapproval?
Yes, you will need to provide your Social Security number (SSN) even when you are applying for just a mortgage preapproval. That’s because your mortgage lender will need to check your credit report and credit history.
Mortgage Pre-Approval Application Form
A 1003 mortgage application, also known as the Uniform Residential Loan Application, is used by most lenders for mortgage applications. 1003 mortgage applications can use Fannie Mae's automated underwriting system (AUS) to automatically retrieve credit history information and provide a mortgage approval decision almost instantly. For mortgage pre-approvals, lenders might use a simplified application instead, such as a short form mortgage application.
A mortgage preapproval application will usually ask for the following information:
- Personal Information: First and last name, phone number, email address, and current mailing address
- Loan Information: If you haven't signed a purchase contract yet, such as if you are still searching for a home or are just starting your home search, then you will be asked how much down payment you will be planning on making. This can be either a down payment amount or a down payment percent. Otherwise, if you already have a purchase contract, then you will be asked for the purchase amount of the home that you are buying along with your planned down payment amount.
- Employment History: Including name and address of current and previous employers, job title, years on job, and gross income.
- Financial Information: List your bank accounts and the balance of each account, the total value of your investments, and the value of any real estate properties owned, such as your primary residence, second homes, and investment properties. You'll also state your debt and other obligations, such as currently monthly mortgage or rent payment, real estate or property taxes, and home insurance premiums.
- Other Information: If you are purchasing a home with a co-borrower, you'll need to provide your co-borrower’s personal information as well. You may also be asked for your real estate agent's name and phone number.
How Long Does Mortgage Pre-Approval Take?
The mortgage preapproval application itself will only take a few minutes. You will usually get a mortgage preapproval decision within three business days, with some lenders offering same-day mortgage pre-approvals. However, if you have a lot of debt, been bankrupt in the past, have had your home foreclosed or have a bad credit score, then it can slow down the preapproval process. If your finances are complex, then it might take over a month to get a preapproval decision.
You might be asked to complete the following declarations. Answering yes to any of the following declarations may delay your mortgage preapproval as further processing might be needed.
- Are there any outstanding judgments against you?
- Have you been declared bankrupt within the past 7 years?
- Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?
- Are you a party to a lawsuit? Have you directly or indirectly been obligated on any loan of which resulted in foreclosure, transfer of title in lieu of foreclosure, or judgment?
- Are you presently delinquent or in default on any Federal debt or any other loan, mortgage, financial obligation, bond, or loan guarantee?
- Are you obligated to pay alimony, child support, or separate maintenance?
- Is any part of the down payment borrowed?
- Are you a co-maker or endorser on a note?
Source: Freddie Mac Form 65
When Should You Get Pre-Approved?
You should get pre-approved as soon as you have decided that you want to purchase a home and are going to begin your home search. While you aren’t required to get a mortgage preapproval to start looking for homes, it’s a good idea to have a mortgage preapproval letter ready. If a home seller requires preapproval, you will be able to show that you have been preapproved rather than having to wait possibly days for a new mortgage preapproval. Having a mortgage preapproval also makes your purchase offer more attractive.
Why should you get pre-approved?
When a seller tries to sell their property, the seller usually wants to see that a buyer can purchase the property. To ensure that a buyer can purchase the property, a seller usually requires them to provide a preapproval letter and a proof of funds letter (POF). This means that even if the buyer knows that they can get a mortgage, they may have a hard time starting a deal with a seller. From the point of view of the seller, they would strongly prefer to go with a buyer who has proof that they can purchase the property.
There are many other reasons why a buyer may want to get pre-approved even if they are not planning to purchase a property any time soon. Getting pre-approved may provide insights into financial issues a borrower may have. If a borrower identifies these issues early enough, they can work on them, which will allow them to get a higher loan limit and a lower interest rate in the future. Generally, there are 3 main reasons why getting pre-approved is beneficial before purchasing a property:
- Home Affordability: Once you are aware of the amount you can afford, it will give you confidence in your search and you won’t have to spend beyond your planned amount. It will also ensure you are realistic and do not go for houses that you cannot afford.
- Closing Advantage: The lender will already have most of the financial information that they need from you, helping to make the closing process faster when it comes time to apply for mortgage approval.
- Credibility: Sellers will be confident in your ability to finance the payment. This will help give you an edge over a buyer who does not have a pre-approved mortgage letter.
Do Mortgage Pre-Approvals Hurt Credit Scores?
When you apply for a mortgage preapproval, the lender will check your credit report. This credit check is a hard inquiry, also known as a hard pull, and has a negative effect on your credit score. There’s no fixed amount that a hard inquiry will lower your credit score by, but it is usually less than a 10 point drop for a single hard inquiry.
Having multiple hard inquiries can cause your credit score to drop more significantly. The good news with mortgages and credit checks is that if the credit checks are all completed within a certain period, usually 45 days, then they all count as only one hard inquiry, rather than multiple hard inquiries. This 45-day period starts on the date of your first credit check and ends after 45 days. All credit checks within this period will count as one inquiry. However, only credit checks by mortgage lenders and mortgage brokers count towards this single inquiry rule. If you apply for other credit products during this time, such as multiple credit cards, then those credit checks will still show up as multiple inquiries.
How Long Does a Mortgage Preapproval Last?
Mortgage preapprovals typically last for 60 to 90 days. The exact length that a mortgage preapproval is valid for will depend on your lender. With some lenders, a preapproval might only be valid for 30 days, while some lenders may offer preapprovals valid for 90 days at a time. Your mortgage preapproval letter will have an expiration date that tells you how long your preapproval is valid for.
Mortgage preapprovals have an expiry date since the preapproval was based on your financial situation at a particular point in time. Your employment situation might have changed and your credit score might have dropped since your preapproval. The more time that has passed since your lender checked your application, the higher the chance that a negative change has occurred. To prevent outdated information, mortgage preapprovals expire and will need to be renewed if it is still needed. For example, if you weren’t able to find a home in the time that your mortgage preapproval was valid for, then you can have your preapproval renewed. Your lender may check your credit again and ask you for updated documents, such as more recent payslips.
Factors That Affect Mortgage Preapproval
There are 4 major factors that can impact the estimate that you receive in your preapproval:
- Debt-to-income (DTI) ratio: The DTI ratio looks at your monthly debt expenses as a percentage of your gross monthly income. A DTI ratio less than 43% is required for a majority of mortgage programs, which means less than 43% of your monthly income should be going towards debt repayments. A lower DTI ratio will result in a higher pre-approved amount.
- Loan-to-value (LTV) ratio: The LTV ratio is calculated by dividing the mortgage amount by the home value. The higher the down payment, the lower the LTV ratio. An LTV ratio of less than 80% can help you avoid private mortgage insurance (PMI).
- Credit score and history: A credit score determines your ability to pay back the debt that you owe. A higher credit score is better as you are seen as less likely to default on your repayments. A minimum credit score of 620 is required by most lenders, however, if your credit score is less than that, you can get an FHA loan which only requires a credit score of 500. Apart from FHA loans, you might also be eligible for USDA loans or VA loans with a lower credit score. In fact, USDA loans have no fixed minimum credit score requirement.
- Income and employment: Being employed with a steady income can greatly improve your chances of getting pre-approved. Lenders will look at your employment history along with your current income.
What Is a Pre-Approval Letter?
When the lender has gone through all your information and reaches an estimate, they send you a preapproval letter showing that they have verified your financials. This is important because:
- Real estate agents want to see the preapproval confirmation before they start showing you homes in order to narrow their search.
- Home sellers will have more confidence in your ability to purchase the home when an offer is made.
A mortgage preapproval letter will include:
- Your pre-approved loan amount
- Your mortgage interest rate
- Your mortgage loan term
- Your loan type
- Your loan LTV
- Preapproval expiration date
- Conditions to credit approval
Getting a Mortgage Preapproval Online
You can apply for a mortgage preapproval online in minutes, or you can apply for a mortgage preapproval over the phone or in person. Different lenders have different preapproval processes. Here’s how to get a mortgage preapproval at some of the largest mortgage lenders in the United States.
Bank of America Mortgage Pre-Approval
Bank of America allows you to prequalify for a mortgage through their Digital Mortgage Experience. You'll need to provide information about your income and bank accounts, and also provide your Social Security number for a credit check.
You won’t be able to get a mortgage preapproval with Bank of America online. That's because you will be required to submit documents such as your pay stubs, W-2 forms, and tax returns. You'll get the results of a prequalification in as little as one hour, while a preapproval with Bank of America can take 10 business days or more.
Wells Fargo Mortgage Pre-Approval
You can’t get a preapproval online with Wells Fargo, but you can get prequalified instantly. To get prequalified with Wells Fargo, you won't need to submit any personal information. No credit check is required either. Instead, you'll enter the price of the home, the down payment you are planning to make, the property location, your income, your monthly debt, and your estimated credit score range.
If you're prequalified, you'll be able to know how much you can qualify for, based on your down payment and home sales price, along with your estimated monthly mortgage payment and cash required at closing.
Navy Federal Mortgage Pre-Approval
Navy Federal lets you apply for a mortgage preapproval online. You may get instantly preapproved with Navy Federal, or it may take longer based on your application. Navy Federal preapprovals are valid for up to 90 days. Your information will still need to be verified even after you have been preapproved, which will require you to submit documents such as your tax returns, pay stubs, W-2 forms, and bank account information.
Chase Mortgage Pre-Approval
Chase lets you get prequalified for a mortgage online. You'll be able to receive a quoted interest rate based on your credit score and LTV. Other factors that Chase considers is your employment history, income, assets, and the property being financed. Chase requires you to submit your Social Security number in order to get prequalified for a mortgage.