When preparing to buy a home, people often begin by browsing online photos and seeking a real estate agent to work with. Yet, the crucial step of getting preapproval is often overlooked. When you’re serious about buying a home, getting preapproval from a mortgage lender is one of the first steps you should take. Preapproval shows realtors and home sellers that you qualify for a home loan and how much house you can afford.

Understanding Mortgage Preapproval

Mortgage pre-approval is a process in which a lender reviews your financial situation to determine your loan qualification criteria. While it doesn’t technically state that you’re qualified for a loan, it reveals how much a lender will be willing to lend you based on your income and debts.

Preapproval is a short process that requires you to provide financial documents to a lender and verify details like your income, assets, credit, and debts. Once the lender determines your ability to pay off mortgage debt, they will provide you with a preapproval letter that is good for 60 to 90 days. The letter shows sellers the amount of money you can potentially borrow and the types of loans you qualify for.

Steps to Achieve Mortgage Preapproval

Visiting a lender when you’re ready to buy a home doesn’t guarantee your eligibility for preapproval. Lenders must first ensure you’re capable of repaying a debt before completing an approval. Understanding the steps for preapproval can help ensure you’re prepared for the process.

1. Set a budget. Consider how much you’re currently paying toward housing or how much you can comfortably afford monthly. Use your calculations to dictate the size of the loan you’ll inquire about.
2. Check your credit. Your credit history and score are major factors in determining your eligibility for a loan.
3. Estimate your down payment. Your minimum down payment (the amount of money you must be prepared to pay upfront) will depend on the type of loan you qualify for and the home’s purchase price. A down payment typically ranges between 3% and 20% of the home’s selling price. Consider how much you’ll need to have in savings before you’re prepared to buy a home.
4. Gather your financial documents. Lenders will need several financial documents to assess your ability to pay a mortgage and how much you should be eligible to borrow. Before visiting lenders, collect the following documents.

– W-2 forms from the last two years

– Pay stubs for the past month

– Personal bank statements for the past 3 months

– Photo ID (driver’s license)

– Employment verification

– Documents describing your current housing arrangement

1. Contact lenders. Contacting multiple lenders allows you to find the lowest rates and fees and determine the best partner for you. Getting multiple preapprovals can also improve seller confidence and potentially speed up closing time.
2. Get your preapproval letter. Completing preapproval with one or more lenders will get you the documentation you need to work with realtors and home sellers. Shop for homes within your price range and share your preapproval letter with realtors when you make an offer.

Importance of Mortgage Preapproval for Homebuyers

Mortgage preapproval is an expected part of the home-buying process. Your preapproval letters show realtors and sellers you’re serious about buying a home and how much you can potentially borrow. Since a pre-approval letter is only good for 3 months or less, sellers can be confident the information is correct, and they aren’t wasting their time working with someone who can’t afford their asking price. While it’s not a guarantee you’ll get a loan, the preapproval shows lenders have done their due diligence to examine your financial situation.

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