Buying a home is a major life milestone, and for many, it is the largest financial commitment they will ever make. It can also be much less stressful or complicated by taking a simple step up-front. One of the most important steps in the homebuying process is getting preapproved for a mortgage. Preapproval helps you as the homebuyer get a clearer picture of what you can afford and what your loan options are. It also makes your offer stronger and more attractive to sellers. Here, we will explore what is involved in preapproval and how to get started. 

What Is A Mortgage Preapproval? 

Mortgage preapproval is a process where a lender looks at your financial qualifications prior to buying a home to determine how much money you are eligible to borrow for a home purchase. This means reviewing your financial qualifications such as income, assets, debts, and credit history. Preapproval involves an actual verification of your income, assets, debts, and credit history, documenting them instead of simply discussing them. 

This means you have more accuracy and certainty of what you can afford than with a “prequalification.” Although prequalification is somewhat similar, it is less in depth and provides a buyer with only a rough estimate. A lender may have only had an initial review of your financial picture and has not reviewed your finances through your actual documentation and credit report as they will when you formally apply for a loan later. 

With preapproval, once your finances have been reviewed, the lender provides you with a preapproval letter, which states the loan amount you qualify for, your interest rate, and the loan terms. 

When Should I Start the Preapproval Process? 

Ideally, you should begin the preapproval process before you start house hunting. Putting in this effort up front gives you an accurate understanding of what homes are within your budget and prevents any surprises later in the process. In fact, the expectation in most home purchase transactions is that an offer is accompanied by a preapproval letter! Beyond this, getting preapproved early gives you time to address any financial issues that might arise during the application process, such as a low credit score or a high debt-to-income ratio. 

Most preapproval letters are valid for 60 to 90 days. After this period, you may need to reapply for preapproval. If you are actively working on buying a new home, avoiding major financial changes such as taking on new debt or missing payments helps prevent potential issues when you make an offer and begin an application for your mortgage. Preapproval is not a guarantee that you will get the loan; it is an indication that, based on analysis of your current financial situation, you are likely to qualify. 

What Are the Steps to Getting Preapproved? 

Assess Your Financial Health 

Before you even begin the preapproval process, understanding where you stand financially is a great first step to before you fully begin the process. Consider how much you would have available as a down payment on a home, compare your income to the amount of monthly debt you pay, and consider your credit score or payment history. If you are not sure of where you stand on any of these, it is still worth discussing with a lender! Calculating your debt-to-income (DTI) ratio, considering how much of a home’s price you would make a down payment on, and evaluating your credit score are all part of the preapproval process. 

Gather Documentation 

Mortgage lenders require various documents to assess your financial situation. Although a lender can direct you on exactly what they will need, be prepared to provide the following: 

• Proof of identity such as a government-issued ID.
• Proof of income such as pay stubs, tax returns, W-2 or 1099 forms, or proof of additional income sources (such as bonuses, alimony, etc.). If your are self-employed, other documentation such as business tax returns, statements, and profit-and-loss statements may be needed. 
• Proof of employment, which could include a letter from your employer or written verification.
• Bank statements supporting the amount that is enough to cover your intended down payment and closing costs.
• Tax returns, typically covering the last two years to verify your income and employment history.
• Debt information, if you are aware of any information that your credit report does not capture.
• Other assets, such as retirement accounts or savings that can help cover down payments and closing costs.

If you plan to apply with another borrower, such as a spouse, partner, or relative, all qualifying information for all borrowers should be gathered. 

Find the Right Lender for You 

Once you have gathered the necessary paperwork, it is time to find a reputable mortgage lender, such as the licensed mortgage experts at Union Home Mortgage. It is important to keep in mind that some lenders specialize in certain types of loans and can help you navigate first-time homebuyer programs, FHA loans, or even programs for veterans and active military. In addition to the loan options offered, lenders may vary on the interest rates, fees, and loan terms they offer. Find a lender that suits your specific needs. 

Complete the Preapproval Application 

Once you have narrowed it down to the lender(s) that fit you, you will need to complete a preapproval application. This is typically done online, though some lenders may require in-person or phone consultations. The application will ask for the detailed financial information discussed before, including the income, debt, assets, and employment status of all borrowers. The lender will review this information, conduct a credit check, and assess other factors. This review often takes a few days, although some lenders may be able to simplify or automate parts of this process, allowing it to be completed even more quickly. If any concerns arise, the lender may request additional documentation or clarification to aid in the approval process. 

Receive Your Preapproval Letter 

Once you are approved, the lender will provide you with a preapproval letter, outlining the loan amount you are eligible for, the loan terms (program, interest rate, repayment length), and any conditions that must be met before final approval. This letter is an important tool when you begin house hunting! You have the information needed to find homes in your price range, and it indicates to sellers that you are a serious and qualified buyer when making an offer. 

What Goes into the Preapproval Decision? 

Several factors influence whether you will be preapproved, how much you can borrow, and the type of loan you qualify for. These include: 

• Credit Score: This is a major factor in determining your loan eligibility. The higher your score, the better the terms and loan options available. A higher score signals healthy debt history and management, and that you are a lower-risk borrower. While a 620 score is typically required for conventional loans, some loans may have programs that permit scores of 580. 
• Income and Employment History: Lenders want to ensure you have stable employment that is likely to continue and reliable income that is sufficient to cover your mortgage payments. This includes your income from employment as well as income from other sources such as rental income, investment income, or alimony. 
• Debt-to-Income Ratio (DTI): This compares your monthly income to your monthly debts and is an important measurement of your ability to repay the mortgage. 
• Assets: Lenders will want to see that you have enough savings for your down payment, closing costs, and “reserves” (a cushion to cover your mortgage payments in case of unexpected expenses). 
• Property Type: Some properties may not meet the lender’s qualifications or are not eligible for certain loan programs. Your lender can communicate any restrictions on the types of properties eligible for the loan program you are preapproved for. 

Why Should I Get a Mortgage Preapproval? 

Knowing what you are preapproved for helps you remain on budget and focused on a home that you can afford. If, on the other hand, any issues came up in the preapproval process, this early effort gives you the time and visibility to address them before you start your home search. 

Having a preapproval letter can speed up the overall homebuying process because your lender has done much of the financial vetting and is likely able to anticipate most clarifications needed in the loan approval process. The only truly “new” steps outside of the financial assessment will revolve around appraisal of the property and ensuring clear ownership through title search. This means that once you find a property, you can move more quickly to finalize the loan. 

In a competitive housing market, a preapproval letter serves to strengthen your offer. Sellers are more likely to take an offer with preapproval seriously when multiple offers being considered. Finally, being preapproved can provide a great deal of peace of mind to be able to focus primarily on the homebuying step of the process! Speaking to a lender such as Union Home Mortgage today can be a tremendously helpful first step.

The information provided here is for informational purposes. When interest rates and loan program information are included, it is for illustration purposes only and not a solicitation or quote for services. This is not an advertisement or loan estimate. Current interest rates, loan programs and qualification criteria can change at any time. If you have questions or need assistance, we can be reached using the contact information above. A conditional pre-approval letter is not an offer to lend, a commitment to make a loan, or a guarantee of specific rates or terms. It is not a formal written commitment to issue a loan. A formal loan commitment may only be issued once a property is identified, a formal application is submitted, and the loan has gone through underwriting and has been evaluated. At the time of final approval, your application must meet UHM’s lending standards, such as receipt of an acceptable appraisal and validation of credit, including information received from independent third parties regarding your credit history, and underwriting information. Your information has not been submitted to underwriting for evaluation and has not yet been approved.