How to get a mortgage preapproval

When you’re ready to buy a house or refinance a mortgage, getting preapproved for the loan is one of the most important steps. A mortgage preapproval is essentially a statement from a lender claiming that they want to work with you and extend a loan with certain terms. You’ll want to go through this process with multiple mortgage lenders to find the best interest rate, fees, and overall offer.

Read more: A guide for first-time home buyers

A mortgage preapproval is a notch below final loan approval. Your finances are vetted to the extent that a lender feels comfortable estimating just how much they might loan you to buy a home — and at what interest rate.

A preapproval will require a credit check and some income and debt documentation. The lender may charge a fee for a preapproval, but that’s not common.

Yahoo Finance Tip: Remember, a mortgage preapproval is not a firm commitment by a lender to offer you a loan. You also aren’t under any obligation to take out a loan with the lender issuing the preapproval. But you’ll have a good idea of your home loan options, what price range of home to consider, and how much your monthly payment might be.

Some lenders will offer a quick mortgage prequalification process online. The terms “prequalification” and “preapproval” are sometimes used interchangeably, but they are technically two different processes.

A prequalification is a lightweight lift for both you and the lender, requiring little paperwork and usually no credit check. It provides a rough idea of your financial standing in the home-buying process, especially regarding your creditworthiness.

A prequalification usually does not require a hard credit pull, so it doesn’t impact your credit score. A preapproval’s hard credit pull will affect your credit score, but there are ways to minimize the damage. (More on that below.)

A mortgage preapproval is a much better gauge of your home-buying qualifications. A preapproval letter is a golden ticket to house hunting because real estate agents and home sellers will know you’re a serious buyer.

Yahoo Finance Tip: You really only need to get preapproved by one lender to get your house hunting underway. Once you have a purchase contract for a home in hand, you’ll want to apply to a number of lenders to receive loan offers to compare.

Read more: The best mortgage lenders for first-time buyers

The preapproval process is usually fairly quick. You’ll answer a few questions, submit some financial documentation, and often agree to let the lender pull your credit report.

Here’s what the process usually looks like:

1. Choose a few mortgage lenders. Try to select a mix of different types of institutions — maybe your main bank, a credit union, an online lender, and one other. This will ensure you have a good selection of rates and terms to compare and choose the right mortgage lender.

2. Answer the preapproval questions. These usually include what price range you’re shopping in, your annual salary, your monthly debts, and, sometimes, your estimated credit score range if the lender isn’t going to pull your full credit report.

3. Gather the requested documentation. You’ll likely need to submit pay stubs to verify your monthly income, tax returns, bank statements, and other financial documents. If you’re a self-employed borrower, you’ll likely have to provide additional financial information.

4. Wait for the lender to evaluate your information. The lender will look at the details and documents you provided and assess your financials. You should hear back within a few hours or days.

Get your mortgage preapproval letter. If you get preapproved, the lender will give you a letter detailing your potential loan amount. You can then use this to guide your home search and submit it with any offers you make.

To give yourself the best chance of getting preapproved — and for the loan amount you need — work on increasing your credit score and paying down debts before you contact a lender.

The following factors will all impact your ability to get preapproved (as well as your loan amount).

• Your monthly debt-to-income ratio. Your DTI ratio is how much money you owe divided by how much money you make. A lower DTI usually qualifies you for lower interest rates and higher loan amounts, while a higher DTI does the opposite.

• Your income and employment history. Lenders use this to determine how much house you can afford. They also want to see that you have a consistent, reliable income coming in before they loan you money.

• The loan-to-value ratio. Your LTV ratio is how your loan amount compares to the total value of the house. If the home you’re buying is worth $400,000 and your mortgage loan is $300,000, your LTV is 75%. Lower LTVs mean less risk for the lender and typically qualify you for lower interest rates.

• Your credit score and payment history. Lenders often pull your FICO score as part of the preapproval process. They want to see a good score (typically 620 is the minimum credit score for conventional loans, and the best rates are available to borrowers with a credit score of 760 or higher) and a history of on-time bill payments.

You’ll usually need to submit some financial documents as part of the preapproval process. Gathering these items early on can help your preapproval move faster and more efficiently.

You’ll typically want to pull together the following documents:

• Bank statements from the last two months, including your checking, savings, or money market account

• Your last two pay stubs for the lender to review your income and take-home pay

• Your last two years of tax returns and W-2 forms

• The most recent statements for any investment or retirement accounts

• Business records, if you’re self-employed or a business owner, such as a year-to-date profit and loss statement and a balance sheet

• A copy of your driver’s license or passport and Social Security number

• Statements for any Social Security payments or other income, such as pensions, child support, alimony, bonuses, or disability benefits you receive

• Contact information for recent employers

• Mortgage documents for any other property you own

• A gift letter if you are using gift money for your down payment

The time frame for getting your mortgage preapproval letter varies by lender. While some lenders offer nearly instantaneous preapprovals, generally speaking, you can expect a preapproval letter within one to three business days.

Yes, getting preapproved will ding your credit score. When you apply for preapproval, the mortgage lender will do a hard credit inquiry to check your creditworthiness. This inquiry will lower your credit score, but usually by only five points or less. And although the hard pull will stay on your credit report for two years, it will only impact your credit score for one year.

There’s also a way to apply for preapproval with multiple lenders without lowering your credit score each time. If you apply for preapproval with several companies within a 30-day window, each hard credit inquiry will only count as one.

So, you could theoretically apply with 10 lenders in 30 days and only lower your score by five or fewer points.

Mortgage preapprovals usually last for 30 to 90 days — some lenders even offer 120-day preapprovals. Hopefully, this will give you enough time to find a home and make an offer. If not, you will probably have to reapply for preapproval.

When you reapply, the lender will do a hard credit pull again, which will ding your credit score. The terms laid out in the new preapproval letter will also be based on your updated financial profile. For example, if your credit score has improved since your initial preapproval, your terms might be better the second time around.

Some mortgage lenders offer preapproval extensions. If this is the case, you likely won’t have to go through another credit report pull or provide updated financial documents.

Shop for a home in your preapproved price range — preferably less. Protect your financial standing by avoiding additional monthly debt, changing jobs, or doing anything that might jeopardize your final loan approval.

You want your credit score and credit history to remain solid, or even improve a bit, before you sign a purchase contract, submit a mortgage application, and get loan offers from lenders.

Learn more: How much house can you afford? Use our free home affordability calculator.

Yes, getting preapproved for a mortgage is one of the most crucial steps in buying a home. A preapproval letter tells you how much you qualify to borrow from the lender, which types of loans you qualify for, and what interest rate you can get. Having a preapproval letter in hand also shows the seller of a house that you are a serious and financially prepared buyer, which could give you a leg up against competing buyers.

The best time to get preapproved is before you begin shopping for homes. Your preapproval will tell you the maximum amount you can borrow, and you’ll want to include your preapproval letter when submitting an offer on a house. It shows you’re serious about a home and can help you stand out from other buyers.

Don’t panic. Talk to the loan officer, review your credit report with them, and ask for specific areas of your financial situation that need improvement. If you need to reduce your debt, ask by how much. If you’re trying to borrow too much, ask what loan amount might be possible. The lender will be happy to walk you through the steps you need to take to get on the path toward preapproval.

If you’re self-employed, you likely won’t have a W-2 to prove your income when applying for preapproval. You may also take more write-offs on your tax returns, making it look like you earn much less than you really do. For these reasons, you’ll usually need to prove your income using other methods — with bank statements or a profit-and-loss statement for your business, for example. You may be preapproved for a non-qualified mortgage, which is for people who can afford a mortgage but have a harder time providing proof of income.

Preapprovals can sometimes affect your credit, though it depends on the lender. Some mortgage lenders pull your credit report as part of the preapproval process, which results in a hard inquiry and can hurt your credit score. Others don’t pull your credit until the full application process.

Yes, but it’s not mandatory. Applying with multiple lenders is a good way to compare offers and find the best deal. Comparing lenders usually results in a lower interest rate and better mortgage terms. Just make sure to research each lender you apply with, check reviews, and see if they have any recent issues filed in the NMLS database. Get loan preapprovals within 30 days to limit the impact on your credit score, since it will show that you’re shopping for one loan, not multiple loans.

Laura Grace Tarpley edited this article.