What Is a Preapproval Letter?

The home buying process involves many steps, but it always starts with getting preapproved for a mortgage. A preapproval letter shows that a lender has checked your credit report and approved you to take out a mortgage.

It can be tempting to skip over the mortgage preapproval process and go straight to looking at potential homes, but this is almost always a mistake. Getting preapproved will ensure that real estate agents and home sellers know you’re a serious buyer. It will also give you more room to negotiate on your offer.

Plus, preapproval gives you a better idea of what kind of home you can afford to buy. Let’s look more closely at what mortgage preapproval is and how you can get started.

How does a preapproval letter work?

In the home-buying process, a preapproval letter serves as tangible proof to potential sellers that the borrower has secured financing. This letter is generated by a lender after evaluating a borrower’s financial information, including credit score, income, and assets. It’s an assurance to sellers that the borrower is financially capable of following through on the purchase.

The preapproval process starts with the borrower submitting an application to the lender, who then conducts a thorough evaluation of the borrower’s finances. Based on this information, the lender will determine the maximum loan amount for which the borrower is eligible and issue the preapproval letter.

Preapproval letters are valid for a specified amount of time – usually between 60 and 90 days. During this time, the borrower can confidently make an offer on a property, demonstrating their commitment and financial stability to the seller.

While a preapproval letter is not a guarantee, it’s an important step in streamlining the home-buying process. It can make all the difference in helping the borrower secure their dream home.

Why You Should Get a Preapproval Letter

The process of buying a home can be overwhelming and stressful, but obtaining a preapproval letter can help alleviate some of those worries. This letter serves as a crucial first step in the home-buying journey, providing potential sellers with the assurance that you are a serious and financially capable buyer.

By taking the time to secure a preapproval letter, you will have a much clearer understanding of your borrowing power and what you can afford. Not only does a preapproval letter give you a competitive edge in a crowded housing market, but it can also save you time and heartache in the long run.

With this letter in hand, you can confidently make an offer on a property. This is because you have taken the necessary steps to secure financing and increase your chances of having your offer accepted.

So, whether you’re a first-time homebuyer or an experienced real estate investor, getting a mortgage preapproval letter should be at the top of your to-do list.

Preparing for Preapproval

Getting preapproved alerts you to any potential problems with your credit or income. Many people have issues with their credit that they need to clear up before obtaining a mortgage will be possible.

If you know about these issues, you can take the necessary steps to clean up your credit first. It’s much harder if you go house hunting first, find a home you love, and then realize you’re not prepared to buy it just yet.

For that reason, preapproval will help you be taken more seriously by sellers and listing agents. Sellers want to accept an offer that they are reasonably certain will go through.

Home loan preapproval assures them that you’re in a position to be able to close on the home. This is especially important in a seller’s market where there could be multiple offers on one home.

And finally, being preapproved for a mortgage gives you more clarity when you start looking at different homes. Without a preapproval letter, you’re really just guessing when it comes to the type of home you think you can afford. Getting preapproved takes all the guesswork out of it.

Preapproval vs. Prequalification

Many people use the terms preapproval and prequalification interchangeably, but they are two different things. Getting prequalified is similar to preapproval, but it’s not quite as accurate or thorough.

When you get prequalified for a mortgage, your lender won’t pull your credit and won’t ask for as much information about your finances. This obviously makes it much less time-intensive for you, but it also means that the information you receive is an estimate that could change.

In comparison, with preapproval, your lender will check your credit and do a more thorough examination of your finances. Because this process is much more comprehensive, you’ll receive a more accurate estimate of how much you’re approved to borrow.

What You Need for a Successful Mortgage Preapproval

Your loan officer will require a lot of documentation before they preapprove you for a mortgage. This can be quite tedious.

But the good news is, you already have access to all the information needed. So, it’s really just a matter of gathering all the necessary paperwork to submit to your lender.

Here is an overview of the documents and information you’ll need to get preapproved:

  • A good credit score: Unless you’re applying for an FHA loan or VA loan, you’re going to need a good credit score to get preapproved for a mortgage. Most mortgage lenders require a minimum credit score of 620 to qualify. However, you’ll receive the lowest interest rate if your credit score is 760 or higher.
  • Employment history: Your mortgage lender will want to see proof of employment before they’ll be willing to preapprove you for a mortgage. You’ll need to provide copies of your tax returns as well as your annual W-2. Your lender may even contact your employer to verify your employment status and income.
  • Proof of assets: You’ll also need to provide evidence that you can afford to pay the down payment and closing costs on your new home. This can typically be done by providing pay stubs, tax returns, or bank statements. If you aren’t able to pay the standard 20% down payment, you must purchase private mortgage insurance (PMI).
  • Your debt-to-income ratio: Debt-to-income ratio (DTI) is the percentage of gross monthly income that goes toward debt payments, such as credit cards, auto loans, and student loans. You must let your lender know of your monthly debts, since this will affect your debt-to-income ratio. You can provide a list with all of your outstanding debt, as well as the loan balance and minimum monthly payments.
  • Additional documents: Your lender will likely want additional information, like your Social Security Number and your driver’s license. And if you’ve been through a divorce or owe alimony payments, you’ll need to provide documentation of that as well.

How to Get Preapproved for Your Mortgage

Hopefully, by this point, you understand what mortgage preapproval is and why it’s so important. Here are the five steps you’ll need to take to get preapproved for a mortgage loan.

1. Check your credit report

Before you even begin the preapproval process, it’s a good idea to request a copy of your credit report from the three major credit bureaus. You can receive your free annual copies at AnnualCreditReport.com.

That way, you’ll know where you stand when it comes to your credit history. And this will give you a chance to review your credit report for any errors or delinquent accounts. It’s a good idea to resolve these issues before applying for mortgage preapproval.

2. Gather the necessary documentation

Take the time to gather the necessary paperwork before you approach your lender. This ensures that you go into the mortgage process prepared, and will help things move along much more smoothly.

3. Submit your application

Now it’s time to apply for preapproval. Your loan officer may have you apply for preapproval online. Answer all the questions as accurately as you can, and submit all the necessary paperwork.

It may be a good idea to apply for preapproval with multiple lenders. This allows you to compare your options and get the most favorable terms possible.

4. Receive your offers

Once your lender has reviewed your credit score and financial information, you’ll receive several recommended mortgage options. At this point, you’ll see how much you’ve been approved for and your recommended loan types. You’ll also get an idea of what your estimated monthly mortgage payment and interest rate might be.

5. Receive your preapproval letter

Once you’ve chosen your mortgage option, your lender will send you a preapproval letter. You can take this letter with you as you begin shopping for your home.

Bottom Line

Applying for mortgage preapproval is probably the least exciting part of the mortgage process, but it’s an essential first step every new homebuyer should take. Getting a preapproval letter will let you know what kind of home you can afford, and it will give you an advantage when you’re negotiating with sellers.

However, keep in mind that a mortgage preapproval is not a guarantee. If you suddenly lose your job or your financial situation unexpectedly changes, then the previous offer will no longer stand. But it’s as close to a guarantee as you can get before finally closing on your home.

Frequently Asked Questions

Why does it matter if I receive a preapproval letter?

It’s essential to get preapproved for your mortgage for a couple of reasons. First, it gives you a realistic picture of the type of house you can afford. And sellers will take your offer more seriously if you’ve already been preapproved for a mortgage.

What is the difference between a mortgage prequalification and preapproval?

Getting prequalified for a mortgage is much less thorough than a preapproval. Your lender won’t run a credit check, and they won’t review your finances as carefully. This makes it much less accurate than receiving a preapproval letter.

If you go through the process of getting preapproved, then it’s likely you’ll be able to close on a home, unless something drastic happens. But if you’ve only been prequalified, your offer could change once the lender does a more in-depth credit check and financial review.

When should I get preapproved?

You should get preapproved before you start looking at homes. That way, you’ll know what kind of home you can afford before you start shopping for a new home.

Will getting preapproved for a mortgage hurt my credit score?

As part of the preapproval process, your lender will conduct a hard inquiry on your credit report. Typically, this can hurt your credit score slightly. However, multiple hard inquiries for a home loan shouldn’t hurt your credit score.

Jamie Johnson
Meet the author

Jamie Johnson is a freelance writer who has been featured in publications like InvestorPlace and GOBankingRates. She writes about various personal finance topics including student loans, credit cards, investing, building credit, and more.