What is a mortgage preapproval?

Happy young couple after being approved for mortgage
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A mortgage preapproval is a letter from your lender stating the estimated amount you’ll be able to borrow. The letter also specifies the type of loan, interest rate and other terms.

This does not guarantee approval for a mortgage (hence the name, pre-approval). Rather, it’s an educated guess.

To estimate the loan amount, lenders take a bird’s eye view of your financial situation. They look over your credit history, credit score, income, assets, debts and employment history to determine how much you can afford.

Once your offer is accepted on a house, they will appraise the home and take a deeper look into your finances to determine final approval.

It’s worth noting that you are not required to get preapproved in order to buy a house. But as you’re about to see, it’s almost always a good idea.

Is a mortgage preapproval letter necessary?

Business photo shows printed text Mortgage Pre-Approval
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While a preapproval isn’t required, it is necessary.

Without a preapproval, you won’t have a clear idea of how much lenders are willing to lend you. That means you could waste your time searching for, touring, negotiating and closing on properties that aren’t even in your price range.

And you won’t just waste your own time.

If you try to close on a house and your mortgage application is denied, you also will have wasted the seller’s time.

Because of this, many sellers won’t take your offer seriously unless you have a preapproval to back it up. This is especially true in a hot seller’s market.

Think about it: If a home attracts multiple competitive offers backed by preapprovals, why would the owners risk selling to someone without one?

As you can see, it almost always makes sense to get preapproved.

The only time it might not be necessary is if you’re a low-risk borrower buying a home well below your means in a slow market. That, or you’re buying with cash, of course.

How do you get a mortgage preapproval letter?

Young couple talks to a mortgage broker
fizkes / ShutterStock

Now that we know why a preapproval is so important, how exactly do you get one?

To start, you’ll need to submit a mortgage application to a lender.

This involves gathering documentation to prove your identity, employment, income, assets and debts. You’ll need:

  • A social security card
  • Bank account statements or a proof-of-funds letter
  • W-2 statements, pay stubs, tax returns and other documents showing proof of a steady income
  • Anything else your lender requests

Digging for information and collecting these documents may seem tedious, but it will make life easier when the time comes to close on a property.

After you submit your documents, your lender will have your information on file, and you’ll have one less task to juggle during the closing process.

Keep in mind that, to get the best interest rates, you will want to be preapproved by multiple lenders. This will allow you to compare lenders and shop around for the best loan terms. The good news is that once you gather all your documentation, applying to additional lenders won’t take much extra time.

And if you’re worried about tanking your credit score with an onslaught of hard inquiries, don’t be. Credit bureaus expect you to shop around for lenders, so as long as all credit inquiries fall within a 45-day window, you’ll be hit with only one hard pull to your credit.

When does a mortgage preapproval expire?

Bright red open house real estate sign in nice suburban neighborhood, sunny day.
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So, now that you’ve collected your preapproval letters, how long are they good for?

That depends on the lender. Your financial situation will change, your lender’s financial situation will change and the state of the economy itself will change. Because of this, preapprovals are valid for only a set time frame.

Most preapprovals are good for 60 to 90 days, but some may expire in as little as 30.

That means no time for dilly-dallying. Armed with your preapproval, it’s time to initiate full-on house-hunting mode.

It would be a shame if your preapproval were to expire just as you found your dream home.

What do I do if my mortgage preapproval letter expires?

Real estate agent handing over house keys with approved mortgage application form
Brian A Jackson / Shutterstock

That said, if your preapproval does expire, it’s not the end of the world.

It just means you’ll have to apply for a new one. And since you already made copies of all your documents and organized them neatly in a folder (you did do that, didn’t you?), the reapplication process should be a breeze.

The downside is that if 45 days have passed, your credit score will be dinged with another hard inquiry.

Speaking of which, if you have a questionable credit history and are concerned about qualifying for a loan, you can also use a preapproval as a sort of diagnostic tool.

By completing a mortgage application six to 12 months in advance, you can uncover (and fix) issues that may prevent you from securing a home loan.

Then, when you’ve fixed any issues and are ready to buy, you can apply for a new preapproval.

About the Author

Mitchell Glass

Mitchell Glass

Freelance Contributor

Mitchell is a freelance contributor to MoneyWise.com.

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