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When a lender issues a mortgage preapproval letter, the document will indicate that it is only valid for a limited period of time. Most lenders issue 90-day preapprovals, but each lender sets its own time limit, and letters with 60-day and 30-day limits are issued as well.
Because preapprovals have relatively short shelf lives, it's wise to time your preapproval applications carefully so you can use them effectively. It's also important to know how long a preapproval will last before you apply. Here's an overview of how to apply for a preapproval and how to use it efficiently.
What Is a Mortgage Preapproval?
A mortgage preapproval is a document from a lender indicating you are conditionally approved for a mortgage loan up to a specific amount to buy a house. It usually specifies the type of loan you qualify for and the interest rate the lender would charge you upon completion of a full mortgage application.
Applying for preapproval is essentially the same as applying for a mortgage. Your lender will assess your income, assets, debt and employment history, and review your credit report and credit score. Keep in mind, preapproval should only be viewed as a preliminary document. This means 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 property you wish to buy.
A mortgage preapproval letter is valuable because it attests to your ability to follow through on a purchase offer. It can provide a significant advantage in competitive housing markets: When a seller is considering several similar offers for a home, a bidder with preapproved financing may have an edge over others who do not, on the grounds that your ability to secure financing is more certain than that of rival bidders. In hot housing markets, sellers may only consider offers from prospective buyers who are already preapproved for a loan.
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 of any steps you may need to take before proceeding.
But remember, 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 before seeking a mortgage.
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, for instance, its removal may positively impact your credit score.
You can access your credit reports for free at AnnualCreditReport.com. You can also get your free credit report and credit score anytime through Experian.
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. Lenders use it, among other factors, to gauge your ability to make a new mortgage payment. Most lenders require your DTI to be below 43%, while some lenders 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 the following:
- Personal information: You'll need to provide your driver's license, passport or other proof of identity. You don't need to be a U.S. citizen to apply for a mortgage. You are eligible for a mortgage as a foreign national if you can prove your residency status.
- Income information: Be prepared to submit recent pay stubs, account statements and your past two annual tax returns.
- Asset and debt information: You'll need to provide your lender with account statements that show your savings, investments, property and other assets. Conversely, your lender will want to see your current credit card, loan and other debt balances. Ultimately, lenders want to see that you have the financial means to cover the mortgage down payment and to help you afford your loan payments if there is a change in your job or income.
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 of time, 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.