What is a Mortgage Preapproval?
With home interest rates having fallen more than a full percentage point from their peak in October 2023 and springtime nearly upon us, we are entering what should be a competitive time to buy and sell homes. One simple, but important, step of preparing to purchase a home is getting preapproved for a mortgage.
A preapproval is an offer from a mortgage lender to loan you a specific amount of money for your mortgage, which is often good for up to 90 days. Again, this is an offer not a commitment. As a homebuyer, you can take this preapproval and show a seller and/or real estate agent that you are serious about purchasing a home.
It’s important to note that preapproval and prequalification are two distinct steps. Prequalification is an earlier step in a homebuying process where you receive a general estimate of what you might be able to borrow for a home loan. It allows you to work with your mortgage lender to identify the right loan for your needs. On the other hand, a preapproval typically occurs right before making an offer on a home.
Below, we will lay out the basics of a preapproval. Why one is important and the steps you can take to getting preapproved.
Why Should I Get Preapproved for a Mortgage?
If for no other reason, a mortgage preapproval will help you understand how much money you can borrow and what homes you can afford. Knowing a loan amount will help you narrow your home options so you can find the perfect home at a price point that won’t break the bank.
During the process of the preapproval, a lender will review your credit history and take stock of your assets, debts and income to determine the amount you can borrow. This will also alert you to any potential problems on your financial record.
Finally, when you go to make an offer on a home, having a preapproval will give you an advantage over other potential buys who may not come armed with one. Sellers will want to work with a buyer who is prepared to close a deal and won’t be tripped up by a financial obstacle during contract negotiations.
What Do You Need for Preapproval?
Preapproval requires you to complete a mortgage application and provide financial documentation that will help a lender ultimately decide on a loan offer. This will be based on your proof of assets, confirmation of income, credit score and employment, among other items.
- Proof of Income: A steady source of income is necessary when applying for a mortgage loan. Homebuyers must often provide lenders with W-2 statements and tax returns from the past two years and current pay stubs that show their year-to-date income.
- Proof of Assets: Buyers will need funds for their down payment and closing costs. All mortgage loans will allow a seller to contribute to all or some of a buyer’s closing costs if negotiated with the seller on the contract. Proof of Assets can come from the sale of a previous home, the buyer’s savings or possibly from secured borrowed funds – all which are factored into the amount a buyer will be preapproved for.
- Credit Score: Most mortgage lenders require a FICO score of 640 or higher to qualify for a conventional loan and 620 or higher for an FHA loan. Mabrey Bank allows scores down to 600 on FHA loans, and in some cases, 580. Good credit scores will result in a lower interest rate for your home loan. For more information on why Credit Scores are important and what you can do to improve yours, click here.
- Employment Verification: Not only does a lender want to see a steady stream of income, but they also want to see your income is likely to continue. Lenders will contact your employer(s) and verify your employment history for the last 24 months.
What Are the Steps to Getting Pre-Approved
- Check Your Credit Score: Ensure your score is where you want it to be before exploring preapproval. Take your time and improve your credit score if necessary to lower your interest rate.
- Compare Lenders and Loan Options: Find a lender that you can trust and provides advantageous terms for your personal financial situation. At Mabrey Bank, we would love to work with you to put you in the home of your dreams. Explore our mortgage loan options here.
- Gather Your Financial Documents: Have all the required paperwork ready to give to a lender to receive your preapproval.
- Submit a Preapproval Application: Apply for your preapproval amount and undergo a credit check to find out your possible mortgage total.
- Receive Your Preapproval Letter: With this in hand, you will be able to make a secure offer on a home.
What Happens Next?
As stated above, a preapproval letter is typically good for 90 days from date of issuance. It’s important not to make any major financial decisions after receiving your preapproval letter and before purchasing your next home (ie: buying a car, changing jobs, etc.).
Now that you have your preapproval letter, you are ready to make an offer on a home and enter into homebuying negotiations. Good luck!