Mortgage preapproval is often one of the first steps you will take in the complex process of buying a home. Like many other aspects of homebuying, it’s one that’s shrouded in mystery and its fair share of misconceptions. Particularly if you’re a first-time buyer, it’s essential to understand what mortgage preapproval is, why it’s important and how to complete the process.
A mortgage preapproval serves two important purposes:
- It allows a mortgage lender to check an applicant’s basic financial background to determine how much it is are willing to lend the would-be buyer for a home loan.
- It gives homebuyers a good estimate of how much they can expect to spend on the purchase.
After the rigorous vetting process required for most preapprovals, successful applicants will receive a preapproval letter that can serve like a bargaining chip during negotiations with a home seller. In fact, most sellers today have come to expect preapproval letters from any serious buyers before considering an offer.
While preapproval letters are taken seriously by sellers and their agents, it’s important to know that they don’t constitute a total guarantee from a lender. There are often contingencies and conditions written into the contract that give the lender the right to revise some terms of the loan before giving the final seal of approval. While rare, it’s possible that a lender could back out of preapproval altogether if any of these contractual obligations are not met. If it happens at all, this will usually occur during the closing process.
It’s also good to know that mortgage prequalification is not the same as preapproval, despite the similar terminology. Essentially, prequalification is the light version of preapproval, since it usually means a lender will perform only a cursory credit check and return with a very general estimate of the kind of home loan it could offer you. Prequalification can help buyers survey their options before committing to one lender, but it won’t count for anything once they start entering serious negotiations with a seller.
In short, preapproval will give lenders a vote of confidence in you as a homebuyer, which provides you with the confidence to make a serious, competitive offer on a home you love. Of course, there is a good deal of work that needs to go into the process first.
What you need for preapproval
Mortgage preapproval is just a few steps away from the real deal, so getting ready for one requires work from you and your lender. First, you’ll need to fill out a lengthy application containing as much information as possible about your personal and financial background. Then you need to provide your lender with documents that prove everything you’ve stated in that application is correct.
Start by collecting all the necessary records and copies you will need, which typically include:
- Identification like your driver’s license, Social Security number, proof of residence and records of your marital status.
- Recent statements from any bank accounts in your name.
- Income tax returns and recent pay stubs to confirm employment and income.
- If you own a business or are self-employed, provide a recent profit and loss statement along with relevant business tax forms.
- A comprehensive list of all financial assets you own (including property and investments) as well as all liabilities you owe (like a previous mortgage, credit card debt or outstanding student loans).
- For first-time buyers who were renting, provide recent canceled rent checks or include records of rent payment in your bank statements.
- If you are using gift money from family or a charitable donation to pay for the down payment, you need to provide written proof from the source of that payment that it is a gift and not a loan.
In the process of reviewing your application, a lender will also pull your credit report to verify the information you provided, as well as to glean additional insight into your financial history. It may be helpful to check your credit report in advance of submitting your application to make sure everything is accurate. If you have any derogatory marks on your report, like bankruptcy or late payments, you may need to provide the lender with proof that those issues are officially resolved.
Mortgage preapproval is a great way to gain a clear view of how much home you can expect to afford, but it’s not something that should be rushed into. Perform as much research on your own as possible into where exactly you want to live and the housing prices in that area to come prepared to the mortgage lender’s office.