What exactly is a mortgage preapproval, and why is it so important?
It’s a letter from a lender outlining the type and amount of loan you are eligible for. The lender issues a preapproval letter after reviewing your financial history, which includes pulling your credit report and score. Preapproval for a mortgage allows you to look for homes within your budget and demonstrates that you’re a serious buyer. It also makes it easier to discover a mortgage lender that will work with you to get a home loan with an interest rate and other terms that are right for you.
How is a pre-qualification different than a preapproval?
Pre-qualification is similar to an audition, whereas preapproval is similar to a dress rehearsal for a real loan application.
A lender can estimate how much mortgage you’ll likely qualify for and some preliminary loan terms without looking too deeply into your financial circumstances. Mortgage pre-qualification is the term used to describe this process. It’s calculated using your estimated credit score and other information you supply to the lender, such as the price of a property you want to buy, your down payment, your monthly bills, and how you want to arrange your loan (length, fixed- or adjustable-rate interest, and so on).
To obtain a preapproval, you fill out a detailed application with supporting paperwork, and the lender pulls your credit report and score before making you an offer in writing to give you a loan at a specific interest rate. Even if you have a mortgage preapproval, your loan must still go through underwriting, which is the final level of due diligence before the loan is issued, if you have a home under contract.
When Should I Get Preapproved?
The best time to be preapproved is right before you go house hunting. Preapproval lets you decide what you can afford by confirming how much you’re qualified to borrow. (However, you might not want to spend as much on a house as you can afford.) A mortgage preapproval letter also gives you an advantage over other buyers who have not yet been preapproved.
The length of time a mortgage preapproval is valid varies by lender, but it usually lasts 90 days. It’s possible that the preapproval letter has an expiration date. You can ask the lender to renew the preapproval if you’re still looking for a home after that. You may be required to give updated information, and your credit may be checked again by the lender.
