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How to Get Preapproved for a Mortgage
By Aly J. Yale MONEY RESEARCH COLLECTIVE
Getting preapproved for a mortgage loan should be your first step in the homebuying process. Not only does preapproval give you a good pulse on your homebuying budget, but it can also add more gravity to your offers and help you stand out from other buyers.
Is homeownership on your radar? Here’s how to get preapproved for a mortgage.
Table of Contents
- Step-by-step guide to get preapproved for a mortgage
- Mortgage preapproval: What to know
- Home loans preapproval checklist
- Summary of Money’s guide to mortgage preapproval
Step-by-step guide to get preapproved for a mortgage
To get approved in advance for a mortgage, you’ll first need to find a lender (ideally several). Then, you’ll fill out a form, provide information about your finances and submit some documentation. Once you’ve finished, you’ll be ready to start your home search.
Want to know more about the preapproval process? Here’s a step-by-step walkthrough.
Step 1: Get preapproved as early as possible
Starting early is the first step. If you know a home purchase is on the horizon in the next few months (or even year), it’s time to begin the preapproval process.
With a preapproval, you’ll have a good gauge of exactly how much you can spend on a home and the mortgage payment and closing costs you need to prepare for. Understanding these will be critical to buying a home within budget.
Step 2: Understand the difference between preapproval and prequalification
The terms “preapproval” and “prequalification” are thrown around often in the mortgage world. And though the two words do sound similar, they’re quite different — both in process and in meaning.
Prequalification is simply a lender saying you might be a good candidate for a loan, along with an estimate of what you may be eligible to borrow. Getting prequalified requires just a few personal details, like your income, the general purchase price you’re looking at, and your estimated credit score. But there’s no documentation or full credit check.
A preapproval, on the other hand, is much closer to actual loan approval. You’ll submit financial information, like bank account statements, pay stubs and tax returns, and the lender will make a hard inquiry into your credit (meaning pulling your credit reports). Once all is said and done, you’ll have an accurate idea of your maximum loan amount and what interest rate you qualify for.
For these reasons, a preapproval is typically a much more useful tool. It’s more accurate (because it’s based on proven, documented details), and it shows sellers you’re a serious buyer who’s willing to put in the work.
To recap:
| Mortgage Preapproval | Mortgage Prequalification |
| The lender reviews tax returns, W-2s, pay stubs and other financial documents | No documentation required |
| Requires a credit check | No credit check |
| Provides an accurate idea of the interest rate and maximum loan amount you qualify for | Is an estimate of how much you can borrow |
Step 3: Take stock of your finances
You should get a good handle on your overall financial situation before you dive into the preapproval process. What’s the maximum amount you could comfortably spend on your new mortgage payment? (This mortgage calculator can help.) Do you have the additional funds for maintenance and repairs? How large of a down payment can you afford?
Your lender will require many of these details during the preapproval process. While they’ll ultimately base your loan amount on the documents you submit (see below), the general home price range you’re considering and your down payment amount will come into play.
You should also take time to pull your credit reports from all three credit bureaus and check your current credit score. These will affect your ability to get a home loan and the interest rate your lender offers you.
The best rates typically go to borrowers with credit scores of 740 or higher. If your FICO is below this threshold, you may want to improve your credit score before applying to get preapproved. It could help you get a lower rate (and lower payment) and make buying a home more affordable.
Step 4: Gather your documents
The next step is to start gathering your financial documents. Having these pulled and organized can make the preapproval process much more efficient.
You should gather the following items:
- Your last two pay stubs
- The last two months of bank statements (checking and savings)
- Statements for any investment or retirement accounts
- Your last two years of tax returns
- Your last two W-2 forms or 1099s
- A copy of your driver’s license, passport or state-issued ID
- Profit-loss statements and business bank statements (if you’re getting a mortgage when self-employed)
You’ll also need a Social Security number or green card, and if you plan to apply with a spouse or co-buyer, you’ll need these documents for them too.
Sometimes, your lender will request other documents during the underwriting process, so stay in touch with your loan officer. They can give you a full list of all paperwork you’ll need to file to get approved.
Step 5: Shop around for the best mortgage lender
Now, it’s time to start shopping for a lender and applying for preapproval. Ideally, you should get quotes from at least three to five lenders (according to Freddie Mac, five will save you the most!) since rates and loan options can vary widely between companies.
Try to find a good mix of institution types — your main bank, an online mortgage company, a big-name lender and maybe even a credit union. Then, fill out their preapproval forms, submit your documentation and agree to a credit check. You should have quotes from each in a few days. These quotes, also called loan estimates, will break down the rate, loan terms, loan amount and other details of the mortgage, and you can compare each offer line by line.
If you’re not sure which lenders to shop with, our guide to the best mortgage lenders can help. And if you’re considering another lender not mentioned on the list, check for any complaints and regulatory actions against them in the NMLS database and look for any bank fees complaints. Shopping around is also important for homeowners looking to refinance, so check out our guide to the best refinance lenders to get started.
Step 6: Consider locking in your rate
Mortgage rates fluctuate daily, so if you’re happy with the interest rate a lender quotes you, you may want to consider locking it in — especially in a time in which rates are rising. A mortgage rate lock sets your rate in stone (at least for a certain time frame), protecting you from rate increases while you shop for a home. Rate locks typically last 30, 45 or 60 days, depending on the lender, but you may be able to lock your rate for longer for an extra fee.
If you don’t find a home by the time your lock’s expiration date rolls around, your rate will change based on current market conditions (meaning if current mortgage rates are higher than when you locked in your rate, your new rate will be higher too). For this reason, if you’re buying a home when rising mortgage rates are a problem, it’s important to lock your rate in early — before homeownership drifts further out of reach.
Step 7: Maintain financial health
Preapproval doesn’t mean you’re home-free with your mortgage. Your lender will usually pull your credit records again before the closing date on the property, and they may want updated bank statements too. If there are any red flags in these documents, your loan amount could change, or you may get denied altogether.
To ensure your loan stays on track, keep a tight rein on your finances while searching for a house. That means no large purchases (don’t buy furniture just yet!), no taking out new credit cards or debts and no big changes to your income or employment status. You should also stay on top of your bills, as late payments could decrease your credit score.
Step 8: Put in a bid
The last step is to find a house, put in an offer, and include your mortgage preapproval letter. Doing so shows sellers that you’ve gone the extra mile and are highly qualified and motivated to purchase their property. Often, it can put you a step ahead of other buyers — especially if a bidding war breaks out.
Mortgage Preapproval: What to know
Many factors go into your mortgage preapproval, including your credit, employment history, debts and more. Here’s a quick look at some of the details your lender will look at when reviewing your preapproval application.
What affects your home loan preapproval
When considering your mortgage application, lenders are trying to do two things: 1) Gauge your debts and the amount of money you can put toward your monthly payment and 2) assess how responsible you are with your finances (i.e., do you pay your bills on time?).
To do this, they’ll put a lot of stock in the following four factors:
Employment status
Most lenders want to see that you’ve maintained the same job or have been with the same company or in the same industry for at least two years. The goal is to determine whether you have stable income that’s not likely to change (or impede your ability to make your mortgage payments) any time soon.
Debt-to-income ratio
Your debt-to-income ratio is a calculation of how much of your income is taken up by your monthly debts. For example, if your car payment, credit cards and student loans add up to $1,500 per month and you take home $3,000 in monthly income, you have a 50% DTI (1,500 / 3,000).
Most lenders want to see a DTI of 43% or lower, though some will go higher — particularly if you’re making a large down payment or have lots in savings.
Loan-to-value ratio
Lenders will also consider your loan-to-value ratio or LTV. This calculation reflects how much of a loan you’d need versus the property’s value. While the lender can’t technically calculate this until you’ve chosen a property, they can estimate your LTV by knowing the price range you hope to buy in and the down payment you expect to bring to the table.
Generally speaking, the lower your LTV is, the easier it will be to get preapproved. On a conventional loan, though, you can technically have an LTV as high as 97% and still qualify. You just may need to pay mortgage insurance, though.
Credit history and FICO score
Credit score and history are some of the most important factors when getting preapproved for a mortgage. Your credit shows lenders how you manage your debts, how long you’ve had credit and how responsibly you use it.
You’ll typically have the easiest time getting a mortgage with a 740 credit score or above. This score will also get you the lowest interest rates. Eligibility depends on the mortgage program you’re using, however, and some loans will allow you to have scores well below this threshold (but you’ll likely pay a higher interest rate as a result).
Here’s a look at the minimum credit scores for all the major mortgage options:
| Type of Loan | Minimum Credit Score |
| Conventional Loans | 620 |
| Jumbo Loans | 680 |
| FHA loans with 3.5% down payment | 580 |
| FHA loans with 10% down payment | 500 |
| VA Loans | None, but 620 is preferred |
| USDA Loans | None, but 640 is preferred |
Why getting preapproved is such a big deal
Preapproval is important for many reasons. First, it gives you a good idea of how much money you’re working with. With a preapproval, your lender will give you an estimated maximum for how much you can borrow. This doesn’t mean you have to borrow the full amount (or even should, depending on your budget), but it does give you a good idea of what you’d qualify for and how much you can bid if necessary.
A preapproval is also a signal to home sellers that you’re serious about the purchase, that you’ve done the work and that your loan is unlikely to fall through. Essentially, it means you come with less risk than other buyers who might throw their hat in the ring.
Some sellers even require preapprovals outright, and most real estate agents say they’re non-negotiable — particularly in a hot real estate market. If you’re not sure you need one before house hunting, talk to your agent about it. They should have recommendations based on sales and trends in your area.
Home loans preapproval checklist
So, how do you know if you’re ready to apply for preapproval? There’s no hard-and-fast answer, but you can generally expect the most favorable terms and easiest qualification process if you have:
- Solid, stable income and employment
- Low debt balances
- A history of paying your bills on time
- A decent credit score (740 or above is ideal)
- An idea of what you can afford monthly
- Your documents ready and in order
- A budget in mind for your down payment
Once you’re in a solid place financially, you can apply for preapproval with several lenders, compare your options and lock in your rate. Then, it’s time to find that dream house and start putting in offers.
Summary of Money’s guide for mortgage preapproval
Whether you’re a first-time homebuyer or just looking to buy a new home, a mortgage preapproval is a good first step toward purchasing a house. It can help guide your home search and make your offers more attractive to sellers.
If buying a home is on your radar in the coming months, start the preapproval process soon to give yourself the best chance of success.
Need help finding the right mortgage companies to apply with? Our list of the best online mortgage lenders can get you started.
