Guide to mortgage preapproval

Mortgage preapproval can benefit you in multiple ways, from helping you to understand your purchasing power to showing sellers that you’re a serious buyer.

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Preapproval is more than just a quick estimate; the lender reviews key factors in your finances to determine how much you may be able to borrow. It doesn’t guarantee you a loan, but preapproval can make the homebuying process easier to navigate.

Let’s look at how mortgage preapproval works, how it differs from prequalification, and what lenders look for. We’ll also outline the documents you may need, so you’ll know how to prepare before applying.

What is mortgage preapproval?

Mortgage preapproval is a lender’s preliminary assessment of your creditworthiness and how much you may be able to borrow. Depending on the lender, you may need to provide financial information or documents such as:

• Proof of income
• Assets
• Credit record
• Information about your current debts

During the preapproval process, a lender will typically check your credit. If a lender preapproves you after reviewing your information, it’ll give you a letter outlining the maximum loan amount you may qualify for, along with conditions you’ll have to meet before final approval.

Why mortgage preapproval matters

A preapproval letter gives you a good idea of how much you may be able to borrow. This can be a big help for your home search, as it gives you an estimated price range to consider—but not necessarily the amount you should spend. Preapproval also shows sellers that you’re serious about the purchase. 

Getting preapproved may even speed up the process of being formally approved for a loan, as the lender has already reviewed much of your information.

Mortgage preapproval vs. prequalification

In addition to preapproval, prequalification can be another way to get an idea of how much borrowing power you’ve got. This typically requires basic financial information, and the lender may check your credit—often using a soft credit inquiry, which doesn’t affect your credit score, though lender policies vary.

By contrast, preapproval is often a more intense process, with its hard credit inquiry and more exhaustive documentation (think income, assets, and debts). It can also take a few business days to get a response.

All that to say, prequalification can be helpful when you’re just beginning the homebuying process to help with budgeting and other early details. Preapproval may come into play when you’re ready to make an offer.

How the mortgage preapproval process works

Check your credit

Your credit score is one of the most consequential factors in the preapproval process. It affects both whether a lender preapproves you and the interest rate it offers you.

Before you apply, check your credit reports from all three credit bureaus for errors. You can access your reports for free at AnnualCreditReport.com. If you find inaccurate credit information, dispute it before a lender reviews your credit file.

The exact credit score you’ll need varies by loan type—and sometimes by lender. Your credit can even dictate the down payment options available to you when you purchase. For example, FHA loans stipulate that:

• Scores of 580 or higher may qualify with as little as 3.5% down.
• Scores between 500 and 579 generally need at least 10% down.

VA loans don’t have an official minimum credit score, but each lender may set its own requirements. Many look for scores around 620, unless you’ve got a large down payment.

Gather financial documents

If you don’t get your documents together before applying for a mortgage preapproval, there could be a lot of time-consuming back and forth between you and the lender. Having everything ready in advance may help you avoid delays. 

You’ll often need to provide your government-issued ID, Social Security number, and address history for the past two years. You’ll also likely need your pay stubs for the past month or two (if you’re a W-2 employee) and W-2s and federal tax returns from the last two years.

If you’re self-employed, a lender may ask for documents such as two years of personal and business tax returns, proof of business insurance, and letters from clients.

A lender may also request:

• Several months of bank statements
• Investment or retirement account statements
• A gift letter (if someone is helping you with your down payment)

Compare lenders

Lenders vary when it comes to mortgage rates and fees. A preapproval doesn’t lock you into using that specific lender; in fact, you should request preapproval from multiple banks, credit unions, and online lenders. That’ll let you compare rates and give you a better picture of what you may qualify for. Once you apply for a mortgage, compare Loan Estimates from multiple lenders to review rates and terms and potentially negotiate.

Keep in mind that interest rates aren’t the only thing that matters when it comes to a home loan. You’ll also want to compare APRs (which account for the interest rate and certain borrowing fees), loan options, expected closing timelines, and customer reviews. 

Submit your application

Most lenders allow you to apply for a mortgage preapproval online. But if you prefer, many banks and credit unions still give you the in-person option.

Undergo a credit check

Again, a lender will often perform a hard credit inquiry during the preapproval process. This is a bigger deal than a soft credit pull, as it may temporarily lower your credit score. Fortunately, comparing rates from several lenders within a short period doesn’t ding your credit multiple times. Your credit report typically treats mortgage credit checks made within 45 days of each other as a single inquiry.

Receive your preapproval letter

When you receive your preapproval letter, you’ll usually find details such as the maximum amount you may be able to borrow, the loan type you may qualify for, a proposed interest rate, and when the letter expires.

Remember that preapproval isn’t a final loan approval; you’re not guaranteed that you’ll receive any financing. The lender still needs to review the home appraisal and confirm that your financial situation hasn’t changed since it issued your preapproval.

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What lenders look for during preapproval

Lenders take a look at several different aspects of your finances to decide whether you qualify for their loan products, including:

• You’ll need consistent and documentable income. Lenders usually verify two years of earnings.
• Lenders want you to have enough money to cover your down payment and closing costs (often 2% to 5% of the loan amount). Depending on your specific loan and your financial profile, you may also need reserves to cover up to six months of mortgage payments. The good news is that investment accounts and vested retirement accounts may count.
• Lenders will review your payment history, credit utilization, average age of accounts, and any black marks on your credit profile (collections, late payments, etc.).
• Financial institutions often review your most recent two-year employment history. Changing jobs won’t necessarily disqualify you if you continue earning consistent and predictable income.

How much can you get preapproved for?

Your debt-to-income ratio (DTI) is one of the most important factors lenders use to decide how much you can borrow. In short, it compares your total monthly debt obligations with your gross monthly income. The lower the percentage, the better.

The exact DTI each lender will accept varies. For example, Fannie Mae generally caps the DTI for manually underwritten loans at 36%, although borrowers with strong credit and enough savings in reserve may qualify with a higher DTI.

Income also matters, as it plays a part in your DTI. As an example, if you’re earning $200,000 per year but have towering debt, you may qualify for less than someone with no debt earning $120,000 per year.

Your credit score also affects your approval odds and interest rate. And a lower interest rate effectively means you can borrow more, as your monthly payment would be more manageable.

Finally, your down payment can also affect your buying power. A large down payment will reduce the amount you need to borrow, and it may help you avoid private mortgage insurance (PMI) on a conventional loan and lead to better loan rates.

How long does preapproval take?

The amount of time it takes to receive a preapproval will vary. Again, submitting an organized, complete package of the required documents can help you avoid delays. You may get a same-day decision—some lenders even respond within a few minutes.

Delays may occur if you’re self-employed or have income that can be harder to verify, such as commission or rental income. You may also need to provide documentation for any large deposits into your bank account.

Even if you do everything right and are quick to respond to further inquiries, a lender may just be extra busy and slow to get back to you.

How long does a preapproval last?

A preapproval letter doesn’t last forever. It reflects what a lender may offer you based on your current financial picture. For this reason, most are valid for 30 to 90 days, depending on the lender.

If your letter expires, the lender can renew it after a review of updated documents. It may also run another credit check. And if your financial situation has improved, it could be worth going through the preapproval process again to try for better rates.

Does mortgage preapproval affect your credit score?

Mortgage preapproval sometimes requires a hard credit pull, depending on the lender. A hard credit inquiry could temporarily lower your credit score. The effect is generally small, but limiting your mortgage credit checks to a 45-day window may help minimize any potential negative score impact.

Despite the potential credit score impact, a hard inquiry may be worthwhile because a preapproval letter can show sellers that you’re a serious buyer.

How to improve your chances of mortgage preapproval

There are several potential ways to improve your chances of getting preapproved for a mortgage. While every lender is different, it can be helpful to focus on the following:

• Eliminating or lowering monthly debt payments can reduce your DTI, which may help you qualify for a larger loan. Paying down credit card balances can also improve your credit utilization ratio—an important credit-scoring factor.
• Try not to take on new debt shortly before (or during) the preapproval process. Financing a vehicle, increasing credit card balances, or increasing other debt obligations may lower your credit score and impact your borrowing power.
• Comb through your credit to make sure there are no incorrect details that could be hurting you, such as inaccurate late payments and balances or accounts that don’t belong to you. Disputing errors before you apply gives credit bureaus time to correct mistakes before a lender pulls your report.
• A larger down payment means you won’t have to borrow as much when you take out a mortgage. Putting at least 20% down on a conventional loan can also eliminate PMI, which could lead to a lower monthly payment.
• Lenders generally review the past two years of your work history to determine whether your income is reliable. Changing jobs won’t necessarily hurt your chances of preapproval as long as you continue earning consistent, predictable income.

What happens after you’re preapproved?

Once a lender preapproves you, you’re ready to submit offers. Here’s what happens next:

• Your preapproval letter tells you how much a lender may be willing to lend you—not necessarily the amount you can comfortably borrow. If you shop below your maximum, you’ll have more flexibility and more room for any unexpected costs after you close.
• Start making offers and act quickly when you spot the right home. Include your preapproval letter with each offer.
• Once the seller accepts your offer, the lender begins its formal underwriting process. It’ll order a property appraisal, re-verify your income and employment details, and complete a full review of your financial file before clearing your loan to close.
• The period from an accepted offer to closing typically takes 30 to 45 days. Respond promptly to the lender to help avoid delays.

The takeaway

Mortgage preapproval is a useful tool for anyone looking to purchase a home. It can help you set a more accurate homebuying budget by estimating how much you may be able to borrow. It can also strengthen your offer, as it shows the seller that you’re a serious buyer.

Frequently asked questions