The Preapproval Process: Getting Ahead In The Mortgage Game

Getting preapproved for a mortgage is a crucial step in the home-buying journey. It is advisable to obtain mortgage preapproval early, ideally weeks before you start thinking about making an offer on a house. This gives you a clear grasp of your budgetary limitations and strengthens your negotiating position. The approval process takes several weeks with some lenders, and pre-approval usually lasts up to 90 days. During this time, it's essential to maintain a good credit score and avoid making any significant changes to your credit history.

Preapproval vs prequalification

When preparing to apply for a mortgage, you may come across the terms "prequalification" and "preapproval". These are types of early approval that can help you find and buy a house. However, they have distinct meanings and purposes.

Prequalification is a preliminary step to determine the size of a mortgage you could get. It is based on the data you submit, such as your income and expected down payment, and is a less reliable estimate of the mortgage size you could qualify for. It is a good first step to give you an idea of how much you can borrow and to narrow down lenders. Prequalification can be completed quickly, sometimes in under an hour, and you will receive a prequalification letter to show to an agent or seller as proof of what you may be able to afford.

Preapproval, on the other hand, is a more official step that requires the lender to verify your financial information and credit history. It is a more specific estimate of what you could borrow and signals what a lender can offer you. It is not a guarantee, but it shows sellers that you are a serious buyer and can increase your chance of having your offer selected. The preapproval process is more involved and takes longer than prequalification, and you will typically receive a preapproval letter within 10 business days. The preapproval letter is valid for 90 days, after which your credit expires.

It is recommended to start your home search one to four months before you want to close to ensure you have enough time to find the right home, negotiate the purchase, secure mortgage approval, and close on time without surprises or delays. Therefore, it is important to time your preapproval application right to preserve your credit and avoid unnecessary expenses.

The preapproval process

During the preapproval process, you will need to submit sensitive data and authorise a credit check. Factors like your credit score, debt-to-income ratio, and income will be assessed to determine the approved borrowing amount. A higher credit score indicates greater creditworthiness and can result in more favourable mortgage terms. It is important to maintain a good credit score throughout the process, as any significant changes could affect the terms of your pre-approval.

To apply for mortgage preapproval, you will need to provide the lender with proof of identity, such as a copy of your passport or driver's license, and your Social Security number. You will also need to authorise the lender to access your credit reports and credit scores. Some lenders may also require additional documents, such as tax returns and pay stubs, to verify your financial ability to follow through with your offer.

Mortgage preapproval typically lasts for 60 to 90 days, but some are valid for as little as 30 days. It is recommended to start the pre-approval process less than four months before buying a house to ensure enough time to explore different neighbourhoods, view properties, and negotiate the purchase. This timing will help ensure a seamless transition from the initial stages of house hunting to the conclusive steps of closing the deal.

How much can I borrow?

Preapproval is an important step in the mortgage process, as it determines how much you can borrow to buy a home. It's a more accurate estimate of your borrowing capacity than prequalification and requires documentation like W2 forms, income details, assets, and a credit check. Lenders will use this information to determine your creditworthiness and the loan amount you can secure.

When considering "How much can I borrow?", it's essential to understand that lenders may approve you for a higher amount than you can comfortably afford. They may offer you the maximum they believe you can afford, which could result in higher monthly mortgage payments. Therefore, it's crucial to assess your financial situation and determine how much you can realistically spend on a home.

A good rule of thumb is the 28% rule, which suggests that your mortgage payments shouldn't exceed 28% of your pre-tax monthly income. This helps ensure that a significant portion of your income isn't dedicated solely to your mortgage. Additionally, consider unexpected financial events, such as job loss or medical bills, which could make it challenging to keep up with higher mortgage payments.

While preapproval provides valuable insight into your borrowing capacity, it's not a guarantee of a loan. You'll still need to go through the full approval process once you've found the home you want to purchase. It's also worth noting that preapproval letters are typically valid for 90 days, after which a lender will need to update your information and confirm your employment status.

In summary, preapproval is a crucial step in understanding how much you can borrow for a mortgage. However, it's important to assess your financial comfort level and ensure that the loan amount aligns with your budget and long-term financial goals.

How to get preapproved

Preapproval for a mortgage is a more in-depth process than prequalification. It involves a hard credit check and a detailed look at your finances and debt-to-income ratio. It's a smart step to take when you are ready to put in an offer on a home.

To get preapproved, you'll need to provide detailed financial information, including:

• Social Security numbers
• Current addresses
• Employment details
• Bank and investment account information
• Proof of income (e.g. W-2 tax forms, 1099s, pay stubs)
• Tax forms
• Information on any debts or loans

You'll also need to provide details on your down payment. If this is coming from the sale of an asset or a gift, you'll need to provide a paper trail. Lenders prefer to see two years of continuous employment, but there are exceptions, such as for self-employed applicants.

It's a good idea to get your finances in order before applying. This can include disputing any incorrect data on your credit report and paying off some existing debts. You can also use a Home Affordability Calculator to get an idea of how much you can comfortably afford.

Preapproval usually takes longer than prequalification and can be done online or in person. You should receive a preapproval letter within 10 business days of providing all the requested information. This is valid for 60-90 days, after which you can request a renewal by providing updated financial information.

It's worth noting that preapproval doesn't guarantee you'll get approved for a mortgage. Once you've found a property, the lender will need to review the property details and perform an appraisal to ensure the loan amount matches the home's value.

The benefits of preapproval

Preapproval for a mortgage is a smart step to take when you are ready to put in an offer on a home. It is the closest you can get to confirming your creditworthiness without having a purchase contract in place. Here are some benefits of preapproving for a mortgage:

Shows You're a Serious Buyer

Preapproval shows sellers that your offer is valid and that you can secure a mortgage. This makes it more likely that you will complete your purchase of the home, and gives you a competitive edge over other buyers in the market.

Speeds Up the Closing Process

Much of your financial information is already in the lender's system, so preapproval typically speeds up the closing process. This is one of the top reasons to get preapproved for a mortgage.

Identify Obstacles Early

A mortgage preapproval will help you identify any potential obstacles before you start the house-hunting process. This means you can get your finances in order and avoid last-minute panics.

Learn About Different Mortgage Options

Preapproval is also an opportunity to learn about different mortgage options and work with your lender to identify the right fit for your needs and goals.

Avoid Sacrificing Your Dream Home

Without preapproval, you may find yourself having to sacrifice the home you really want, increase your budget, or panic to get your finances in order. It is best to know your position early on in the process so you can house hunt with confidence.

Frequently asked questions