Understanding Preapproval When Buying a House: What It Means and How It Can Help

Buying a home can be an exciting process, but it can also feel overwhelming and complicated. One of the first steps you might want to take when preparing to buy a house is getting preapproved for a mortgage. Learning about the preapproval process and its benefits can help you succeed in your home purchase.

What is Preapproval?

The preapproval process involves a mortgage lender taking a look at your finances to evaluate how much money they are willing to lend you. This includes an examination of your income, credit history, assets, and debts. Unlike pre-qualification, which is a preliminary review and estimate of what you might be able to borrow, preapproval is a more detailed and formal assessment that results in a preapproval letter. This letter shows sellers that you are a serious and qualified buyer, giving you an advantage in a competitive housing market.

The Preapproval Process

Assessing Your Finances

Before starting the preapproval process, it’s important to assess your finances. A good place to start is checking your credit score, as a higher score can improve your chances of getting approved and securing better loan terms. Take a look at your credit report and take the initiative to improve your score if possible. You’ll also want to look at your debt-to-income ratio, which compares your monthly debt payments to your gross monthly income. Lenders use this ratio to determine your ability to manage monthly payments. Before getting preapproved, take steps to reduce your debt and improve this ratio to boost your preapproval prospects.

Gather Financial Documents

The first step in the preapproval process is gathering all the necessary financial documents. These usually include:

Recent pay stubs
Tax returns and W-2 forms (typically from the last two years)
Bank statements
Documentation of assets, such as stocks or bonds
Information on current debts, including credit cards, car loans, and student loans

Choose a Lender and Complete a Mortgage Application

Choose a lender and file for preapproval, which can often be done online, over the phone, or in person. A preapproval application will result in a hard inquiry on your credit, which may make your credit score drop a few points. If you choose to apply with multiple lenders to compare mortgage offers, those hard pulls may be able to be grouped together under mortgage preapproval on your credit report.

Lender Evaluation

The lender will review your financial documents and credit report to evaluate your debt-to-income ratio, employment history, credit history, and overall financial stability. This thorough assessment helps the lender determine how much they are willing to lend you.

Receive Preapproval Letter

If you meet the lender’s criteria, you’ll receive a preapproval letter stating the loan amount for which you qualify. This letter is usually valid for a specified period, typically 60 to 90 days.

How Preapproval Can Help You

Understanding Your Budget

Going through the preapproval process—and getting approved—can give you a better picture of how much you can afford. Knowing your exact budget can help refine your home search, saving you time and effort.

Strengthening Your Offer

In competitive markets, a preapproval letter can be one signal to sellers that you mean business. It may give you an edge over other potential buyers who have not been preapproved.

Speeding Up the Buying Process

Since your financial situation goes through a thorough review during the preapproval process, you may be able to close more quickly once you’ve found a home you love.

Identifying Potential Issues Early

The preapproval process can also reveal any financial issues that need to be addressed before you can get a mortgage. This gives you time to resolve these issues and improve your financial standing.

By taking the step to get preapproved, you can boost your confidence as a buyer and demonstrate your commitment and financial readiness to sellers.

This blog post is meant for informational purposes only and does not constitute professional real estate advice.