What Is a Mortgage Preapproval?

A mortgage preapproval is a valuable document that can significantly impact your home-buying process. It represents a lender's conditional approval for you to obtain a mortgage loan, typically up to a specified amount, to purchase a house. This document not only outlines the type of loan you qualify for but also specifies the interest rate you would receive upon completing a full mortgage application.

To secure a mortgage preapproval, you'll need to go through a process similar to applying for a mortgage. The lender will evaluate various aspects of your financial profile, including your income, assets, debts, employment history, credit report, and credit score. It's important to note that a preapproval is a preliminary document, and your lender won't fully approve your loan or finalize terms until they verify information about you, any co-borrowers on the loan application, and the property you intend to purchase.

One key advantage of having a mortgage preapproval letter is its ability to enhance your competitiveness in a housing market. In situations where a seller receives multiple offers for their home, a buyer with preapproved financing often gains an advantage. Sellers may view such buyers as more reliable, given that their ability to secure financing is relatively certain compared to others without preapprovals. In highly competitive housing markets, sellers may even prioritize offers from prospective buyers who are already preapproved for a loan.

How to Get Preapproved for a Mortgage

The process of obtaining a mortgage preapproval is relatively straightforward and can often be done online. Here are the steps you should follow:

1. Check Your Credit

It's advisable to review your credit report and credit score before the lender does. This helps you identify and address any issues that might negatively impact your creditworthiness. A credit score of at least 620 is generally required to qualify for a mortgage, with higher scores improving your chances of approval and better interest rates. It's also a good idea to calculate your debt-to-income ratio (DTI), which measures your monthly debt obligations against your gross monthly income. Most lenders prefer a DTI below 43%, and some aim for ratios below 36%.

2. Gather Your Financial Information

Prepare the necessary financial documents, including those related to your employment, income, and assets. Lenders typically require the following:

• Personal information: Provide proof of identity, such as a driver's license or passport. You don't need to be a U.S. citizen to apply for a mortgage; proof of residency status is sufficient.
• Income information: Submit recent pay stubs, account statements, and your past two annual tax returns.
• Asset and debt information: Present your account statements, which should include details of your savings, investments, property, and other assets. Additionally, your lender will want to see your current credit card, loan, and other debt balances. Lenders want to ensure that you have the financial means to cover the mortgage down payment and handle loan payments in case of changes in your income or employment.

3. Choose Your Lender

It's recommended to compare multiple mortgage lenders to explore the various types of loans available. Getting preapprovals from multiple lenders can help you identify the loan with the lowest interest rate and fees, potentially saving you thousands over the life of the loan.

While comparing lenders may involve upfront costs, the potential savings in the long run can make it a worthwhile investment. When you're ready to make purchase offers, submit a preapproval application to your chosen lender(s). Note that you may be charged an application fee, but in many cases, this fee can be credited if you proceed with that lender for your mortgage.

Ready to get started with your mortgage preapproval? Contact Tony Byrne today to begin the process and take the first step towards your dream home.

4. Receive Your Preapproval

Once you've submitted all the required documents, the lender will review your application and make a preapproval decision. This process typically takes one to a few days. Once you receive your preapproval letter, be sure to include a copy of it with every offer letter you submit for a property.

Does a Mortgage Preapproval Affect Your Credit Score?

Yes, applying for a mortgage preapproval can have an impact on your credit score. When you apply for preapproval, the lender will conduct a credit check, resulting in what is known as a hard inquiry on your credit report. Hard inquiries can cause a temporary dip in your credit score, typically by only a few points.

The good news is that the impact of a hard inquiry on your credit score is relatively short-lived. It usually lasts for just a few months, and after a year, it won't be factored into your scores at all. Eventually, the inquiry will be removed from your credit report altogether after two years.

Furthermore, if you apply for preapprovals with multiple lenders within a short period, your credit score won't suffer multiple hits. These inquiries, made within a condensed timeframe and related to a single mortgage loan, will generally count as a single inquiry or may not affect your score at all, depending on the credit scoring model used.

The Bottom Line

In summary, obtaining a mortgage preapproval letter can provide a significant advantage when making an offer on a home. It offers valuable insights into your budget and can make you a more attractive buyer in competitive markets. However, since most preapprovals have a maximum validity of 90 days, it's essential to time your preapproval application carefully. Only pursue a preapproval when you're genuinely ready to embark on your home search and make an offer.

Looking for expert guidance on securing a mortgage preapproval? Schedule a consultation with Tony Byrne today and get on the path to homeownership.