Understanding Mortgage Preapproval: A Comprehensive Guide

At O1ne Mortgage, we understand that buying a home is one of the most significant financial decisions you’ll ever make. To help you navigate this journey, we offer expert guidance on mortgage preapproval, a crucial step in the home-buying process. Call us at 213-732-3074 for any mortgage service needs, and let us assist you in securing your dream home.

What Is a Mortgage Preapproval?

A mortgage preapproval is a document from a lender indicating that you are conditionally approved for a mortgage loan up to a specific amount. This document usually specifies the type of loan you qualify for and the interest rate the lender would charge upon completing a full mortgage application. Essentially, applying for preapproval is similar to applying for a mortgage. Your lender will assess your income, assets, debt, and employment history, and review your credit report and score.

It’s important to note that a preapproval is a preliminary document. Your lender will not fully approve your loan or finalize terms until they verify information about you and any other borrowers on the loan application, as well as the property you wish to buy. However, a mortgage preapproval letter is valuable because it attests to your ability to follow through on a purchase offer. In competitive housing markets, a bidder with preapproved financing may have an edge over others who do not, as your ability to secure financing is more certain.

How Soon Should I Get Preapproved for a Mortgage?

It’s generally best to get a preapproval letter before you begin to look at homes seriously. The preapproval can help you understand how much home you can afford and may give you a competitive edge if multiple buyers submit offers on a home. If you’re not sure if you’re ready, a loan officer can do an informal review of your finances and credit and provide guidance on any steps you may need to take before proceeding.

Most preapprovals only last up to three months, so you don’t want to get one too early. The last thing you want is to have your preapproval expire before you’ve found your ideal home. Before applying for a mortgage preapproval, get ready to buy a home by researching the market you want to live in, enlisting the services of a real estate agent, and taking steps to spruce up your credit profile.

Waiting too long to get a preapproval, however, could leave you at a disadvantage in a competitive market. For example, you could find the perfect home, but another buyer could snatch it up while you’re waiting for the lender to review your preapproval application. As such, getting a preapproval just before you begin actively looking at homes may be your best option.

How to Get Preapproved for a Mortgage

The preapproval process is relatively straightforward, and you can usually submit your application online. Follow these steps to obtain a mortgage preapproval letter:

1. Check Your Credit

It’s wise to review your credit report and credit score before your lender does to identify and shore up any issues that may be hurting your credit. Remember, you have the right to dispute information on your credit report. If information has been incorrectly reported by a creditor or is the result of fraud, its removal may positively impact your credit score.

You can access your credit reports for free at AnnualCreditReport.com. Generally, you’ll need a credit score of at least 620 to qualify for a mortgage. A higher score will improve your odds of loan approval and better interest rates. While you’re at it, it’s also a good idea to determine your debt-to-income ratio (DTI), which measures the total amount of your monthly debt obligations against your gross monthly income. Most lenders require your DTI to be below 43%, while some prefer ratios below 36%.

2. Gather Your Financial Information

Gathering your financial documents—including those related to employment, income, and assets—can help your application process go smoothly. Documents lenders typically require include:

• Personal information: Driver’s license, passport, or other proof of identity.
• Income information: Recent pay stubs, account statements, and past two annual tax returns.
• Asset and debt information: Account statements showing your savings, investments, property, and other assets, as well as current credit card, loan, and other debt balances.

3. Choose Your Lender

The Consumer Financial Protection Bureau (CFPB) recommends comparing at least three mortgage lenders to discover the different types of loans available. Getting preapproval from multiple lenders can help you find the loan with the lowest interest rate and fees, potentially saving you thousands of dollars over the life of the loan.

Comparing lenders could cost you money upfront, but it may be worth the investment if you find a lower rate that provides substantial savings over time. When you’re ready to begin making purchase offers, you’ll submit a preapproval application to the lender or lenders of your choice. You may be charged a fee of several hundred dollars, but in most cases, you can get that back as a credit if you end up getting your mortgage with that lender.

4. Receive Your Preapproval

Once you’ve supplied all required documents, a preapproval decision could take as little as one day, but typically takes a day or two longer. Once you receive a preapproval letter, include a copy of it with every offer letter you submit.

Does a Mortgage Preapproval Affect Your Credit Score?

When you apply for a preapproval, your lender will check your credit, which can impact your credit score. This credit check causes an entry known as a hard inquiry to appear on your credit report. Hard inquiries can cause credit scores to drop slightly, typically by only a few points.

As long as you keep up with your bills, a score reduction related to a hard inquiry typically lasts only a few months. The inquiry won’t be factored into your scores after a year and will be removed from your credit report altogether after two.

Fortunately, if you apply for preapprovals with multiple lenders in a short period, your credit score won’t be negatively affected each time. Because the multiple inquiries are made within a short time period and tied to one mortgage loan, you’ll only get dinged once (or not at all), regardless of the number of lenders that process your preapproval.

The Bottom Line

A mortgage preapproval letter can give you a competitive advantage when placing an offer on a home. However, since most approvals last a maximum of 90 days, it makes sense to get your preapproval letter only when you’re truly ready to search for a home and make an offer.

If you’re trying to shape up your credit before getting preapproved, consider accelerating the process for free with Experian Boost®. As its name suggests, this feature can help lift your credit by giving you credit for bills you already pay, including your rent, utilities, and streaming services.

At O1ne Mortgage, we are committed to helping you achieve your homeownership dreams. Call us at 213-732-3074 for any mortgage service needs, and let our experienced team guide you through the preapproval process and beyond.