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How And Why To Get A Mortgage Preapproval

Kevin Graham6-Minute Read
September 16, 2020

The single most important thing you can do before heading out on your home search is get a mortgage preapproval. Not only will this give you a clearer picture of exactly how much you can afford to spend, but sellers often look at preapproval as an indication of the seriousness of the buyer.

In the rest of this article, we’ll cover how to get preapproved for a home loan and why it can be incredibly important.

What Is A Mortgage Preapproval?

A mortgage preapproval is a determination by a lender of the amount you’ll be able to afford when you’re looking to buy a home. The lender makes this determination by reviewing your credit report, income, assets and debts.

A preapproval isn’t a commitment to lend. Your house still has to pass an appraisal to qualify for whichever mortgage option you’re exploring. Additionally, because you often can’t lock your rate until you find the property, the approval amount and monthly payment are based on a hypothetical interest rate.

While a mortgage preapproval isn’t an ironclad guarantee that your loan will end up closing, having a preapproval does show sellers that you’re serious in your intent to purchase a home and have the financial resources to follow through.

Preapproval Vs. Prequalification

Before we go further, it’s useful to distinguish between a preapproval and a prequalification. Some lenders use these terms interchangeably, but they’ve traditionally meant different things. To avoid confusion, let’s go over the terms.

In a prequalification, a lender usually pulls your credit report to see your median FICO® Score as well as any existing monthly debt payments or blemishes you may have on your credit report. They’ll also ask for verbal or written estimates of your income and assets to calculate your debt-to-income ratio (DTI) and down payment savings.

While a mortgage preapproval also has all of these inputs taken into account, the difference is that income and assets are verified through items like W-2s, tax returns, pay stubs, bank and other financial statements. This means you and the sellers you’re trying to impress can place a lot more trust in the number on that piece of paper.

While prequalifications are a good way to come up with a budget and an initial estimate of how much you can afford, in the eyes of sellers and the real estate agents, they don’t mean very much because none of the numbers are verified. This can be particularly problematic in markets experiencing low inventory, like much of the U.S.

Because lenders sometimes use one term when they really mean the other, it’s helpful to have a way of cutting through the confusion. Rocket Mortgage® by Quicken Loans®1 has what we refer to as the Power Buying Process.

A Prequalified Approval is like a prequalification. We pull your credit and get your best guess as to your income and assets. While this is a good first step to give you a ballpark figure, we highly recommend all of our clients go further and get a Verified Approval.2

A Verified Approval includes a credit pull, but we also verify your income and assets with documentation. This gives you the certainty associated with a mortgage preapproval.

What Is A Mortgage Preapproval Letter?

If a lender offers you a preapproval, they’ll issue you a preapproval letter. A good preapproval letter will contain several pieces of information:

  • The amount of the preapproval
  • How long the letter is valid for – at Quicken Loans, and this is 90 days from the date it’s issued
  • Which loan option is being used (e.g. 30-year conventional)
  • Our preapproval letters also tell you whether income, assets and credit have been verified

Home buying is a negotiation. For that reason, you may not always want sellers to know that you’re approved for a home loan that’s higher than their asking price. Once you’re approved, you can edit the amount shown on the preapproval letter up to the amount of your preapproval from Quicken Loans in order to assist your negotiation.

Why Is A Mortgage Preapproval Important?

A mortgage preapproval is important for a couple of reasons: Sellers will take your offer more seriously if they see that you’ve done your due diligence in securing a home loan to back up your offer. You’ll also have increased confidence, because you’ll know exactly how much can afford.

Sellers And Showings

We can’t overemphasize the importance of having your offer accompanied by a preapproval letter. The sellers and their real estate agents who are showing the home want to know that they can be reasonably assured that your offer won’t fall through.

Having a home loan preapproval is even more important now when inventory is tight and there may be a ton of competition for your dream home. To give you an idea of just how competitive it is out there, there are only 3.1 months’ worth of existing or preowned home inventory available at the current sales pace.

On the new home sales side, supply isn’t much better at 4 months relative to sales. For reference, a market is considered neutral when there’s 6 months’ supply available.

In other words, sellers can afford to be picky right now. If you get in a bidding war, sellers may not accept your offer if you don’t have a financing plan in place. You may also be competing against other people who are offering cash, so being able to show certainty in your offer with a strong preapproval is extremely helpful.

Buyers And Budgets

When you have a preapproval before you begin house hunting, you can shop with the certainty of knowing exactly how much you can afford, especially if your documentation has been verified.

If you get income and asset documentation compiled in advance, you can also save yourself time down the line in the process and potentially even close faster. There are many things that can temporarily hold up the process like the appraisal, inspection and title work, but documentation will be one less hurdle to overcome.

How To Get Preapproved For A Mortgage

Now that you understand the importance of the mortgage preapproval, let’s run through the process.

Step 1. Get Financially Ready

If you’re looking to buy a home in the near future, your first step should be to make sure you’re financially prepared. There are a couple of steps you can take to get ready.

  • Check Your Credit: Lenders and the mortgage investors they work with have minimum standards for your credit score, so it’s important to have an understanding of where you stand. Our credit tool will allow you to check your VantageScore®0 score and report once a week. Because mortgage loan qualification is based on median FICO® Score, you should also know you can get credit reports from all three bureaus once a year from AnnualCreditReport.com. This will also alert you in advance if you have negative marks that could pose a challenge to work through.
  • Pay Down Your Debt: To the best of your ability, you should pay off or pay down as much debt as you can. Your ability to qualify for various loan options is dependent on your DTI ratio which compares your minimum monthly installment and revolving debt payments to your gross monthly income. For the best chance of qualification, you want to keep your DTI at 43% or less.

Step 2. Gather Your Documents

The next step to a successful preapproval process is gathering documentation. In order to have a preapproval analyzed, you’ll need to provide the following:

  • Income: We recommend our clients have the last two pay stubs, 2 years’ worth of W-2s and 2 years’ worth of tax returns. If you get a 1099, include those, too.
  • Assets: You should be prepared to provide the last two statements for any bank or investment accounts you plan to use for a down payment or to show reserves in the event of a loss of income.

If you’re self-employed, we look for 2 years of business tax returns. Additionally, because of the changing business conditions after COVID-19, we’ll be asking for recent audited or unaudited profit and loss statements.

Step 3. Shop Around

When you’re going through the process of applying for a mortgage loan, it won’t hurt to shop around and apply with multiple places. There are a couple of reasons for this:

  • Compare The Financials: When shopping around and comparing rates, you’ll see two rates, with one being higher than the other. The lower rate is the one your monthly payment is based on. The second rate contemplates the base rate plus other costs like mortgage insurance and closing fees. The bigger the difference between the rates, the more you’re being charged in closing costs.
  • Get Comfortable: It’s not just rates you should be worried about, but also how the lender will treat you, so you need to be comfortable. Do they charge fees for mail-in or phone payments? Will they service your loan after it closes, or will the servicing be sold? Will they proactively reach back out to you if there’s an opportunity to get you into a lower rate? All of these things need to be considered.

Mortgage Preapproval FAQs

As with any major financial qualification, a mortgage preapproval comes with its own set of frequently asked questions. Let’s cover a few of them here.

When Should I Begin The Mortgage Preapproval Process?

Once you’ve made the decision that you’re ready to buy a home, you should feel free to get preapproved as soon as possible. Given the fact that the market is tight, you never know when you’ll find a home you really like.

Getting preapproved will give you time to figure out the top end of your budget and give real estate agents the idea that you’re serious about the financial commitment.

If you don’t yet have a real estate agent, Rocket Homes Real Estate LLC can help you find an agent in your area who will align on your goals, find homes in your price range and work with you throughout the negotiation process.

It should also be noted at this point that while your preapproval represents the higher limit of what you can afford. That doesn’t mean you have to or should spend that much. Make sure you’re taking into account your other financial and lifestyle goals in addition to providing for an emergency fund.

Why Do Lenders Put An Expiration Date On Preapproval Letters?

As mentioned above, Quicken Loans preapproval letters are good for 90 days. Beyond that, they can be extended only with a new credit check and updated income and asset verification. The natural question for you might be why preapprovals expire.

You can think of a preapproval as a snapshot in time. It reflects your credit, income and asset situation at the time the preapproval is taken. A lot can change in 3 months. Maybe you get a raise or lose your job. Maybe you have to get a new car and the payment changes your DTI. Lenders want to make sure you still qualify.

Make sure you check with the lender as well. Some lenders may be shortening their preapproval periods given the current economic situation. You don’t want any surprises.

Will Multiple Preapproval Applications Hurt My Credit Score?

When you make an inquiry for a loan or line of credit, lenders or creditors are required to submit a hard credit pull. This pulls down your score temporarily. FICO® says the typical drop is less than 5 points.

The good news is that there’s a rate shopping exception. For mortgages, car and student loans, inquiries for the same type of loan that occur within a 30-day time span are counted as a single inquiry for the purposes of scoring.

The rate shopping exception means that you should feel free to inquire with several lenders to see about their offers without fear of being penalized with multiple inquiries. Just make sure to do all of you shopping within 30 days of the first inquiry.

Summary: Getting Preapproved Shows You Mean Business

A mortgage preapproval lets you know how much you can afford to spend on a home by doing a credit check and verifying your income and asset documentation. This is distinguished from a prequalification which involves verbal or written estimates of income and assets.

Because the terms are used interchangeably, Quicken Loans calls a preapproval a Verified Approval. In any case, real estate agents and the sellers they represent prefer preapprovals backed by documentation for the certainty they provide. It also lets buyers feel confident about their offer.

In order to make sure you’re ready, check your credit and pay special attention to your DTI. Typical necessary documentation includes W-2s, pay stubs and tax returns. If self-employed, be prepared to provide profit and loss statements and business tax returns.

Because you never know when you might find the right house, you should apply for preapproval as soon as you’re ready. It is important to note that preapproval orders do expire, although they can be renewed. You can also feel free to check around because there’s a rate shopping exception for mortgages if you shop within 30 days.

If you’re ready to move forward with a preapproval, you can get started online with Rocket Mortgage® by Quicken Loans®. You can also check out some of our other home buying content.

1 Quicken Loans® and Rocket Homes Real Estate LLC are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.

2 Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply.

Get the right home loan for you.

Kevin Graham

The Rocket Homes blog is here to bring you all you need to know about buying, selling and making the most of your home. Whether you’re thinking about becoming a homeowner, selling your current home or looking to keep your place in tip-top shape, our writers and freelancers bring their experience and expertise to meet you right where you are.