How Mortgage Preapproval Works

A mortgage preapproval is a lender's written, tentative statement that it is willing to lend you up to a certain amount, based on a review of your income, assets, debts and credit. It is not a loan offer or a promise to lend, but it shows sellers you are a serious buyer and helps you shop in a realistic price range. Prequalification is usually a lighter first look, though lenders use the two terms differently.

Prequalification vs. preapproval

Both letters estimate how much a lender may be willing to lend, and both rest on assumptions. The difference is usually how much the lender checks before writing the letter.

• Prequalification often relies on information you report yourself, such as your income, savings and monthly debts. Some lenders do this without verifying anything or pulling credit.
• Preapproval usually involves a credit check and a closer look at documents such as pay stubs, tax records and bank statements.

The catch is that there is no single industry definition. One lender may call its letter a prequalification while another calls the same kind of letter a preapproval. Some lenders go further and issue a written commitment to lend up to a set amount for a limited period, subject to limited conditions. Because the label says little on its own, ask each lender exactly what it reviewed before issuing the letter.

What lenders review

A lender's job at this stage is to get a reasonable picture of whether you can repay a loan of a given size. Most look at four areas.

• Income: How much you earn, how stable it is and how you are paid. Salaried income is usually simpler to document than self-employment, commission, bonus or seasonal income.
• Assets: Money available for your down payment, closing costs and reserves, and where it came from. Large or unusual deposits may need an explanation, and gift funds usually need a signed gift letter.
• Debts: Car loans, student loans, credit cards, child support and other monthly obligations. Lenders compare your debts to your income to judge what payment you can handle.
• Credit: Your credit reports and scores, payment history and any recent late payments, collections or public records.

Some lenders base preapproval only on what you tell them. Others ask for documentation up front. Each lender sets its own process, so ask what it needs and how long the letter will remain valid.

What to have ready

You can speed things up by gathering your paperwork before you apply. Commonly requested items include recent pay stubs, W-2 forms and federal tax returns, statements for checking, savings and investment accounts, documentation of other income such as child support or alimony, proof of identity and your Social Security number. Self-employed borrowers should expect to provide more extensive income records.

It also helps to decide a few things before you call. Know roughly what price range you are considering, how much cash you plan to put toward the purchase, whether anyone will be giving you gift funds and whether a co-borrower will be on the loan. If you are a veteran or servicemember interested in a VA loan, you will also need a Certificate of Eligibility. Clear answers make the lender's estimate more accurate.

How the credit check works

Lenders typically check your credit before issuing a preapproval letter. This lets them see your scores and history and spot issues early. Credit scoring models generally recognize that people shop for mortgages, so several mortgage inquiries in a short shopping period are usually treated differently from a string of unrelated credit applications. Ask each lender what type of credit check it uses.

If something on your report is wrong, such as an account that is not yours or a payment wrongly marked late, a preapproval can bring it to light while you still have time to dispute it.

Why getting preapproved early helps

• Sellers take your offer seriously. Many sellers and listing agents want to see a preapproval letter before accepting an offer.
• You learn your range. A preapproval amount gives you a ceiling to work with, though it is not the same as what you can comfortably afford.
• You find problems early. Credit errors, missing documents or income questions are easier to fix before you are under contract.
• You move faster. Much of your paperwork is already with the lender once you find a home.

Preapproval letters can expire, so timing matters. Many buyers get preapproved when they are ready to start touring homes in earnest.

What preapproval does not do

A preapproval is not a final approval and not a loan application that locks you in. It does not commit you to that lender, and it does not lock an interest rate. You are free to apply with other lenders and compare their Loan Estimates once you have a property under contract.

Final approval comes later, after underwriting reviews your full file, the property is appraised and any conditions are met. Ask the lender two useful questions: what assumptions were used for your preapproval, and what could lead to a denial, a higher rate or higher costs later.

Preapproval amount vs. your budget

Only you can decide how much you are comfortable spending each month. The amount on a preapproval letter is based on the lender's guidelines, which may not account for childcare, savings goals, commuting costs or other parts of your life. It may be higher or lower than the budget you set for yourself.

Many buyers choose a comfortable monthly payment first and work backward to a price range. Be upfront with your real estate agent about your limit. You do not have to show a seller a letter for the full amount you were preapproved for; some lenders will issue a letter matched to a specific offer.

Keeping your preapproval on track

Between preapproval and closing, lenders often recheck your credit, income and accounts. Changes can affect your approval. While you shop and wait to close:

• Avoid opening new credit cards or taking out new loans, such as a car loan.
• Keep paying every bill on time.
• Talk to your lender before changing jobs or moving large sums between accounts.
• Document the source of any large deposit.
• Send updated pay stubs and statements promptly when asked.

If you are not preapproved

If a lender reviews your credit and decides not to preapprove you, it must send you an adverse action notice explaining the decision, even if you never filed a formal application. If a credit score played a part, the notice should show the score used and explain how to get a free copy of your credit report.

Ask the lender what would need to change. Correct any errors on your credit reports, and consider talking with a HUD-approved housing counseling agency, which can help you build a plan to strengthen your credit and savings. A different lender or loan type may also be worth exploring, since programs vary by borrower, property and investor.

Frequently asked questions

Next steps

• First-Time Home Buyer Loans
• Home Loans

Sources

• What's the difference between a prequalification letter and a preapproval letter? (CFPB)
• Get a preapproval letter (CFPB)
• Create a loan application packet (CFPB)
• Gather and update your paperwork (CFPB)