If you take a poll of 100 real estate agents and ask what the most important first step for buyers is, the vast majority of responses will be, “get a preapproval for a mortgage.” Cash buyers can bypass this step, but for any buyer planning on financing their home purchase, preapproval for mortgages is absolutely vital. I will share what a preapproval is (and is not), the differences in prequalification vs preapproval, how to get a preapproval for a mortgage, and why every financed buyer should have one before they even think about going home shopping.
Before we dive into all the details of getting preapproval for a mortgage, I should point out that I am not a lender. As a real estate agent in California I regularly consult closely with lenders on behalf of my clients. I am aware of the vital role lending plays in a real estate transaction. However lending norms vary, and I strongly encourage you to consult with a reputable, local lender that can advise you based on your particular circumstances. The information I share below is intended to cover many of the questions that come up when I am working with home buyers. If you are contemplating buying a home, I think you will find this article to be extremely valuable. It can help you avoid painful pitfalls and will set you up for a successful home purchase.
What a Preapproval for a Mortgage Is – And What it Isn’t
At its most basic, a preapproval is a letter from a lender affirming that you will likely qualify for a loan. The preapproval will typically be for the maximum amount the lender would lend to you. The preapproval for a mortgage will be based on a careful vetting of your finances. The process to obtain the preapproval includes an application, documentation of your assets, income, employment status, tax returns, credit score, etc. Based on the financial information you provide, the lender will advise you on the maximum amount they will lend to you. This typically informs you of the maximum home price you can qualify for.
The preapproval is NOT a guarantee of financing. A closer look at a particular home or changes in your employment and finances can impact your ability to obtain a loan and for how much. Once you identify a home and get into escrow, the home will need to be in livable condition and go through an appraisal. Your lender will need to review and confirm all relevant details about your finances and the home itself before issuing a final loan approval. Preapproval for mortgages is the gold standard in preparing to purchase a home. However, even with a preapproval, you likely won’t know with 100% certainty whether or not the lender will approve your loan until well into the purchase process.
Prequalify vs Preapproval
These terms are often used interchangeably, however there is a significant difference between them. A prequalification is a more general estimate of what a lender might be willing to lend a home buyer. Prequalifications, or “prequals” are often obtained with minimal financial documentation. Home buyers often complete the application for a prequal online or over the phone with their bank or financial institution. The turn-around time for a prequalification vs preapproval is far faster. There is simply less documentation involved in a prequal. Borrowers can have an automated response from their lender in as little as 30 minutes. With a prequalification, buyers often enter in their own estimates of financial figures, which are accepted without being verified by the lender.
A preapproval for a mortgage is a much more in-depth, and therefore accurate, look at a buyer’s ability to finance their home purchase. Rather than relying on ballpark figures from a borrower, the lender goes through a checklist of documentation. That documentation is designed to give a lender clear insight into the borrower’s finances. The preapproval process is also designed to catch any potential problems that might impact financing. It is quite common for issues to come up, and they can often be resolved or addressed before a lender issues a preapproval for a mortgage.
Who Should You Go to for Your Preapproval?
Different borrowers have varying preferences and needs. Some prefer to have all their finances with a bank or credit union they are already bank with. Other borrowers don’t care who holds the loan as long as they get the best rate. Sometimes working with a local lender is advantageous compared to an out of state bank or broker. If you already have a real estate agent you trust, then asking them for lender referrals is a great place to start. Agents know the importance of lending, and many will have several lenders they know and trust. If you don’t already have an agent, then reaching out to the bank you do most of your banking with can be helpful.
I prefer local mortgage brokers over big banks. They usually have more loan options and tend to have more insight into the local mortgage markets. A local lender can often deliver more personalized service than the big banks, and they do so with more accountability and accessibility. If you run into an issue with a loan from a big bank, you are often relying on action from people out of state that your loan officer has little to no influence over. Sites like Realtor.com and Yelp usually have reviews on lenders as well.
How to Get a Preapproval for a Mortgage
Although it’s best to do some homework ahead of time, getting the preapproval is as simple as calling the lender and letting them know you’d like a preapproval. The process will go more smoothly and quickly if you already have your financial documentation readily available. If you’re meeting your lender in person, you may be able to bring needed documentation with you. However, most lenders will ask that you scan any documentation you don’t already have in digital form and then securely uploading the information to them. Be wary of emailing documentation that contains private information – standard email is not secure.
What Your Lender Will Need for Your Preapproval
The requirements for a preapproval can vary, however this checklist should cover most of the items your lender might request. It is best to ask your lender exactly what you will need to get preapproved, to make sure you have everything they need and to avoid any wasted effort. The documents your lender might ask for will also depend on your employment status (eg. self employed borrowers will need different documentation from salaried employees). The documents will vary based on where you derive your income from as well. The list below should give you a good idea of what your lender may request for your preapproval.
Typical Preapproval Documentation Requirements
Often an online form
- Applicant Data
Copy of Government Issued Photo ID’s, typically drivers license(s)
- Verification of Employment
This will also typically be verified just prior to closing as well to make certain your employment has not changed.
- Employment Income
Paystubs: (most recent) and W-2’s (most recent 2 years)
Tax Returns: (most recent 2 years)
Self Employed: Any 1065 Partnership Returns or 1120 Corporate Returns (most recent 2 years)
Self Employed: Year to Date Profit and Loss Statement with 3 months most recent corresponding business bank statements supporting current income
- Any Retirement Income
This might include recent pension and Social Security award letters, 1099’s, recent bank statements documenting retirement deposits, recent statements for mutual funds, IRA’s or any other source of retirement income, and copies of recent IRA or Annuity distribution checks.
- Any Rental Income
Your lender may ask you for the 2 most recent months of rental income (documentation standards for this have become more detailed during the pandemic, eg. copies of rent checks, etc).
Bank statements – (most recent 2 months). This is for documenting money for the down payment and for any reserve requirements.
- Residential Real Estate Owned
Copy of Homeowners Insurance Declarations Page with Annual Premiums for all Residences and Rentals
Copy of Mortgage Payment Coupons for all Residences and Rentals
Most recent HOA billing statement to verify monthly HOA dues and Contact Information (For Condos) Residences and Rentals
Preapproval Documentation Tips
Make sure to include all pages for any of the documents your lender asks you for. eg. If your bank statement is 5 pages total, make sure you include all five pages, even if some of them are blank. They will typically request these as hard copies or pdf statements; screenshots are not recommended. For tax returns, lenders will probably want all pages, schedules and K1’s from any partnerships, corporations, LLC’s, or trusts income on the return. Your lender will be able to turn around your preapproval more efficiently the more complete and organized your documentation is.
Should You Shop Around for Multiple Preapprovals?
Not all banks, lenders, and mortgage brokers follow the exact same lending criteria. Sometimes you can find a more favorable rate with another lender. The amount a lender will pre-approve you for can also vary. Some lenders might allow for a smaller down payment and others might only lend based on a higher down payment.
These variations can make it helpful to seek preapproval from more than one lender. Going through the preapproval process with a couple lenders can also give you a chance to compare how responsive and helpful each lender is. Talking to a couple different lenders can help you narrow down who is offering you the best options and who you are most comfortable working with. If you have high confidence in a single lender based on recommendations or working with them previously, then talking to another lender may not make sense.
Will a Preapproval Hurt Your Credit Score?
This question comes up frequently. Some home buyers are under the impression they should avoid getting a preapproval for a mortgage because the credit inquiry can hurt their credit. I have asked several lenders about this, and their response is that generally this concern is overblown. One or even multiple credit inquiries (assuming they are all for a mortgage) are not likely to have a significant impact on your credit score according to the lenders I spoke with.
A hard vs soft credit check also comes into play. Some inquiries are “soft”, such as when a lender is evaluating you for a prequalification. A hard inquiry is more likely to have some impact on credit score. If a significant number of credit inquiries show up for different types of loans, that can impact credit scores as it may be seen as a red flag to lenders. However, if you’re shopping for a mortgage, a couple credit inquiries for preapprovals are unlikely to have an impact on your financing. If you have concerns a credit inquiry might adversely impact you, I would encourage you to speak with your lender before they run a credit check.
Do You Have to Use the Lender That Gave You Your Preapproval?
A misconception that sometimes deters home buyers from seeking preapproval for a mortgage is that you have to use whoever you obtain your first preapproval from. The preapproval is not a commitment from the lender nor is it a contract that binds you to that specific lender. You could use one preapproval when making an offer on a home and then decide to use a different lender if you reach an acceptance.
However, just because you can switch lenders after you get into contract on a property, doesn’t necessarily mean it’s a good idea to do so. Vetting your lender options before you find a home you want to pursue is prudent. Timelines for you and your lender can be very tight once you are in contract on a property. Losing valuable days while switching lenders can put deals at risk. So while one preapproval doesn’t lock you into that lender, it is best to determine which lender you plan to work with before you find a house to pursue.
How Long Does the Preapproval Process Take?
The answer to this question mostly boils down to how quickly you can get the required documentation to your lender. Another variable is how complicated your finances are. If you provide all the required documentation and there aren’t any notable issues, some lenders can turn-around a preapproval in less than 24 hours.
On the other hand, if your application turns up questions, credit issues, or requires additional documentation, your preapproval for a mortgage could be delayed for days, weeks, or in extreme cases – months. Since surprises don’t make themselves known ahead of time, this is another reason it’s important to engage a lender well before you start home shopping. Doing so will give you time to work out any credit issues or resolve any surprises while not under extreme time pressure.
How Long Does the Preapproval for Mortgage Last? When Does the Preapproval Expire?
Some lenders put a specific expiration date on a preapproval letter. Even if there is not a specific “preapproval expiration date”, a preapproval is usually good as long as your financial details haven’t changed significantly, AND as long as the lender’s lending conditions have not changed. Many lenders will simply tell you what they can preapprove you for, and then provide an actual preapproval letter once you are making an offer on a property.
Should You Include Your Preapproval Letter When Submitting an Offer?
When I am representing a seller here in San Diego, California, I will advise them not to respond to any offer until it is accompanied by both a preapproval and proof of funds (documentation showing the buyer has enough money to cover their down payment and closing costs). Most listing agents in our market take a similar approach. When I represent buyers, I always advise them to include their preapproval and proof of funds with an offer.
Often buyers will ask their lender to provide a fresh preapproval letter saying they are preapproved for the specific offer amount the buyer plans to offer. Of course, this assumes the offer amount is at or below what the lender has preapproved them for. For example, a buyer might be preapproved for a $900,000 purchase but is writing an offer for a property at $850,000. In that case the lender may provide a preapproval letter showing they are preapproved for $850,000. The idea here is that it discourages the seller from assuming the buyer can or is willing to pay more than their initial offer. In highly competitive sellers’ markets, it can sometimes be beneficial to show a stronger preapproval, as it may make you appear more solid financially vs a competing offer.
Should You Wait Until You Find Your Dream House to Get a Preapproval?
I saved this question for last since it seems to be an approach a lot of buyers gravitate toward. The short answer to this question is resounding no. Getting your loan preapproval prior to shopping has a number of clear advantages:
- Clarifying what you can afford and what price range you should be shopping in.
- Resolving lending problems before you are under the pressure of a purchase contract.
- Providing an opportunity to resolve credit issues so you can get financing or a higher loan amount.
- Avoiding losing your dream home because the sellers require a preapproval and you don’t have one fast enough.
- Avoiding losing your dream home due to a cancellation from a problem that would have been caught in a preapproval.
- Increasing your chances of getting an accepted offer, especially in competitive market conditions.
- Avoiding unnecessary stress from unexpected credit / lending issues once you are already under contract on a home.
In summary, obtaining a preapproval for a mortgage is a vital first step for all but cash home buyers. With a preapproval in-hand from a lender you trust, you will be ready to pounce when the right home pops up. And, once you are in contract, you’ll be far more likely to complete the purchase. Like having a thorough home inspection, preapprovals also help to minimize stress and unwelcome surprises.
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