There are a few things to consider before you buy your first home. You need to know your budget, whether you want a condo, townhouse, or single-family home, what neighborhood you want to live in, and your must-have features. But there’s another critical step you need to take before you start looking in earnest. Once you’re ready to start touring houses, you need to get preapproved for a loan.
Thankfully, getting preapproved is a simple process—one that you no longer have to make an in-person appointment to do. You can simply apply online with a bank and, once you provide the necessary information, you can get preapproved in minutes. Here are some important things to know about getting preapproved.
1. It’s Not the Same as Getting Prequalified
When you get prequalified, your lender will estimate how much you can borrow based on the financial information you supply to them. They can give you an idea of what kind of mortgage you can apply for, but they won’t actually verify your information. A prequalification is less authoritative than a preapproval.
When you get preapproved, the lender is verifying that they have done a preliminary assessment of your finances and are ready to give you a loan. You will still need to complete a mortgage application and the lender will do a more thorough audit of your finances when you officially apply for the loan. However, the preapproval letter says that once you submit the necessary documents and make an offer on a home—barring any major issues—your loan will be approved.
2. Get Preapproved Right Away
If you’re worried about just how much house you can afford, the banks won’t beat around the bush in telling you that your aspirations are bigger than your finances. Preapproval takes the budgeting guesswork out of searching for homes since you’ll learn the actual amount you can borrow. Not to mention that most sellers won’t even consider your offer without one. Which brings us to…
3. Home Sellers Expect It
Many sellers won’t take you seriously without a preapproval letter. In particularly competitive markets, agents won’t even work with you or show you homes if you’re not preapproved. So, once you’re ready to start looking, and especially when you want to put in an offer, you need to get preapproved first.
4. Check Your Credit
You’ll need to provide this information to your lender, so it’s a good idea to check your credit score and report prior to applying for preapproval. Your credit score will help your lender determine what types of loans are available to you and more accurately quote a rate. You can receive your credit report for free and it will not affect your credit score. Once the bank does a credit inquiry, it will lower your score by a few points. However, multiple inquiries from several banks within a short span of time will not ding your credit, so don’t be afraid to shop around for mortgages either.
5. Gather Necessary Financial Information
There are quite a few documents you’re going to have to provide to receive a preapproval letter. Be prepared by having these documents ready:
- W-2 forms (from the last two years)
- Pay stubs (usually from the last 60 days)
- Bank account statements (usually from the last 60 days)
- Investment account statements (usually from the last 60 days)
- Tax returns (from the last two years)
- Other sources of income (side job, bonuses, etc.)
In addition to your financial information, your lender will also need personal information like your driver’s license and social security number, so be sure to have those ready, too.
6. Understand Preapproval Conditions
Once you have all the information you need, the underwriting system should deliver your preapproval letter in a matter of minutes with one of four conditions: approved, approved with conditions, suspended, or denied.
If there are more conditions that still need to be met, it usually means that some information is missing. If you are denied, it could mean that your financial situation is stable enough to take on a home loan yet, or you need to build up your credit score.
It’s okay if you have a bit more work to do before getting the letter in hand—your lender will be able to provide you with advice to help you meet any existing conditions.
7. The Letter Isn’t Valid Forever
Things change, including your financial situation. A typical preapproval letter will only be valid for 60 to 90 days once you receive it. Since the time frame varies, be sure to ask your lender about it when you apply.
