How to Get Pre Approved? A Step by Step Guide to Mortgage Pre Approval

Kari Cooper

Buying a home is a big decision and one of the most significant financial commitments you’ll ever make. To make the process smoother, getting preapproved for a mortgage is essential.

This guide will walk you through everything you need to know about mortgage preapproval, from the process and benefits to common mistakes and tips for increasing your chances of approval.

What is Mortgage Preapproval?

Mortgage preapproval is a process where a lender reviews your financial situation to determine the maximum loan amount and interest rate you qualify for.

This involves checking your credit score, income, assets, and other financial details. Once approved, you'll receive a preapproval letter stating the loan terms you qualify for.

Preapproval vs. Prequalification

Prequalification

Think of it like a rough estimate. You tell the lender some basic info about your income and debts, and they give you an idea of how much you might be able to borrow.

Preapproval

This is more detailed. The lender looks closely at your finances, like your credit score and income documents, to give you a precise borrowing amount.

Why Getting Preapproved is Your First Step to Homeownership

1. Know Your Budget

Getting preapproved helps you understand your budget, so you can focus your home search on properties within your financial reach. This clarity saves time and effort, allowing you to target homes you can realistically afford.

2. Gain a Competitive Edge

In competitive real estate markets, a preapproval letter can make your offer stand out. It shows sellers that you are a serious buyer with the financial backing to follow through on your offer, which can be advantageous in bidding wars.

3. Smooth Out the Process

Having a preapproval can streamline the loan application process. Since much of the financial vetting is already complete, you can move more quickly through the final approval stages, which is crucial in fast-moving markets.

4. Compare Your Options

Knowing the loan terms for which you are preapproved allows you to make more informed decisions regarding your down payment, interest rates, and monthly payments. This knowledge helps you choose the best mortgage product for your needs.

5. Peace of Mind

House hunting can be stressful, but preapproval can alleviate some of that stress by confirming your purchasing power. You'll have confidence knowing you can afford the homes you're interested in, making the process more enjoyable.

The Mortgage Preapproval Process

1. Gather Your Documents

Start by organizing essential paperwork such as recent pay stubs, W-2 forms, and tax returns to demonstrate your income stability.

Collecting recent bank statements and detailing your assets and debts provides a comprehensive financial snapshot.

2. Submit Your Application

Complete the preapproval application thoroughly, including all required documentation.

This step initiates the lender's assessment process and helps streamline the evaluation of your financial health.

3. Credit Check

As part of the preapproval process, the lender will conduct a hard inquiry on your credit report.

This assessment determines your creditworthiness by reviewing your credit history and score, influencing the terms of your loan offer.

4. Financial Review

Your lender will scrutinize your financial situation, including your debt-to-income ratio, employment history, and overall financial stability.

This thorough review ensures that you meet the necessary criteria for mortgage preapproval.

5. Receive Your Preapproval Letter

Upon approval, you'll receive a formal preapproval letter detailing the maximum loan amount you qualify for, along with the terms and conditions of the loan offer.

This document is crucial for demonstrating your financial readiness to prospective sellers when making an offer on a home.

Documents Needed for Preapproval

Proof of Income: W-2 statements, pay stubs, tax returns

Credit History: Comprehensive credit report

Employment Verification: Letters from employers, employment contracts

Identification: Driver’s license, Social Security Number

Bank Statements: Recent bank statements showing savings and checking account balances

List of Assets: Information on any additional assets like stocks, bonds, or other properties

List of Debts: Details on outstanding debts, including credit card balances, student loans, and other liabilities

Check out our complete detailed checklist.

Mistakes to Avoid During Preapproval

Avoid Changing Jobs

Changing jobs during preapproval can make lenders nervous about your income stability. They like to see a steady job history to feel confident you can make mortgage payments.

Tip: If you need to change jobs, try to do it well before or after the preapproval process. Let your lender know about any job changes.

Maintain Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is important. Big purchases or new debts can increase your DTI, making you seem riskier to lenders and possibly affecting your preapproval.

Tip: Wait on large purchases or new debt until after your mortgage is secured. Focus on paying down existing debts to improve your DTI ratio.

Keep a High Credit Score

A high credit score helps you get better mortgage rates. It shows lenders you handle credit well. Keep credit card balances low and pay your bills on time to maintain a good score.

Tip: Check your credit report regularly for errors and fix any mistakes right away. Don’t close old credit accounts, as they help your credit history.

Prevent Hard Inquiries

Applying for new credit can lead to hard inquiries on your credit report, which can temporarily lower your score. Many hard inquiries in a short time can make lenders think you’re a higher risk.

Tip: Avoid applying for new credit cards or loans during the preapproval process. Use services that offer soft inquiries to check your credit score without affecting it.

Get Preapproved in 2 Minutes!

In today’s digital age, several lenders offer fast and convenient preapproval processes that are completed within minutes, without affecting your credit score. These streamlined services use automated systems to accelerate the review process, delivering a preapproval decision swiftly.

Get Preapproved Now! or Contact us today to learn more.

Common Misconceptions About Preapproval

1. Preapproval Will Hurt My Credit Score

Misconception: Many believe that applying for preapproval will negatively impact their credit score.

Reality: When you apply for mortgage preapproval, lenders check your credit with a hard inquiry. This might lower your score a bit temporarily, but the impact is usually minor. At Austin Capital Mortgage, we aim to minimize any negative effect on your credit score during this process.

At Austin Capital Mortgage, we prioritize transparency and minimize the impact on your credit score during the preapproval process.

2. Preapproval Guarantees Loan Approval

Misconception: Some homebuyers think that a preapproval letter guarantees they will receive a mortgage loan.

Reality: A preapproval letter shows you're likely eligible based on your finances. But final approval depends on verifying your documents and the property's appraisal.

3. Preapproval Determines My Budget Exactly

Misconception: Some homebuyers assume that preapproval determines exactly how much they can spend on a home..

Reality: Preapproval gives an estimate of the maximum loan amount. Your budget should also consider your monthly expenses and future financial goals.

4. Preapproval Is Binding

Misconception: Some believe that getting preapproved means they are committed to using that particular lender for their mortgage.

Reality: Preapproval does not obligate you to work with a specific lender or commit to a mortgage. It simply serves as a valuable tool to streamline the homebuying process and strengthen your position as a serious buyer. You are free to shop around for the best mortgage terms and rates even after receiving preapproval.

5. Preapproval Is Valid Forever

Misconception: There's a misconception that once you receive a preapproval letter, it remains valid indefinitely.

Reality: Preapproval letters typically have an expiration date, usually ranging from 60 to 90 days. During this period, your financial situation should remain stable, and you should avoid major changes that could affect your eligibility, such as job changes or large purchases.

6. I Shouldn’t Apply for Preapproval Until I Find a Home

Misconception: Some believe that they should wait until they find a home they want to buy before seeking preapproval.

Reality: Getting preapproved early helps you understand your budget and strengthens your offer when you find the right home. It speeds up the closing process too.

Preparing Your Finances for Preapproval

1. Check Your Credit Report

Start by checking your credit report from all three major credit bureaus (Equifax, Experian, TransUnion). Look for any mistakes that could lower your credit score. Fixing errors early can boost your chances of getting a better mortgage deal.

2. Improve Your Credit Score

Your credit score affects your ability to qualify for a mortgage and the interest rate you'll get. To improve it:

Pay Bills on Time: Timely bill payments are essential for a good credit score. Late payments can hurt your credit history and lower your score, impacting your mortgage eligibility.
Keep Credit Card Balances Low: Maintaining low credit card balances, ideally below 30% of your credit limit, shows lenders you manage credit responsibly, boosting your chances for mortgage approval.
Avoid Opening New Credit Accounts: Opening new credit accounts leads to hard inquiries, which can temporarily lower your credit score. It's wise to avoid this before applying for a mortgage to maintain a stable credit profile.

3. Manage Your Debt-to-Income Ratio (DTI)

Lenders look at your DTI ratio—how much you owe each month compared to your income. To lower it:

Pay Down Debts like Credit Cards: By reducing high-interest credit card debts, you lower your overall debt burden and improve your debt-to-income ratio, making you more attractive to lenders for mortgage approval.
Consider Ways to Increase Your Income: Exploring avenues to boost your income, such as seeking additional work or developing new skills, can enhance your financial stability and affordability for a mortgage, demonstrating your capacity to manage long-term financial commitments.
Create a Budget and Stick to It: Establishing a budget helps manage income and expenses effectively, directing more funds towards debt repayment and savings. This demonstrates financial discipline to lenders, improving your chances of mortgage preapproval.

4. Save for Down Payment and Other Costs

Start saving for a down payment and other costs like closing fees:

Set a Savings Goal Based on Your Home's Price: Determine a specific savings target for your down payment aligned with the price range of homes you're considering. This goal keeps you on track to afford your desired property and demonstrates financial readiness to lenders.
Plan for Expenses like Appraisal and Insurance: Prepare for additional costs such as appraisal fees and homeowner's insurance in your budget. Planning ahead ensures you're financially equipped for all aspects of home buying, avoiding surprises during the mortgage application process.
Research Potential Closing Costs: Familiarize yourself with potential closing costs, which can include fees for title searches, attorney services, and property taxes. Understanding these expenses helps you budget accurately and plan for a smooth mortgage closing.

5. Gather Your Documents

Get your paperwork ready such as:

W-2 statements, pay stubs, tax returns, Comprehensive credit report and more.

Check out our complete detailed checklist.

6. Avoid Big Financial Changes

Stay stable financially:

Don't Switch Jobs: Lenders prefer steady job history to assess your income reliability. Changing jobs during preapproval can raise concerns and impact your mortgage application.
Avoid Major Purchases: Big buys like cars or furniture can increase debt and affect your ability to qualify for a mortgage. Keeping spending stable helps maintain a strong financial profile for mortgage approval.
Maintain Existing Credit Accounts: Keeping your current credit accounts active shows responsible credit use. Closing accounts or moving debts before applying for a mortgage can hurt your credit score and impact approval chances.

By preparing your finances well before applying for mortgage preapproval, you can boost your chances of getting approved for the home loan you want.

FAQs

Q) How to Increase Your Mortgage Preapproval Amount

A) If you find that the preapproval amount is lower than expected, there are a few steps you can take to potentially increase it:

Improve Your Credit Score: Pay off debts, correct errors on your credit report, and avoid late payments.
Increase Your Income: Consider taking on additional work or negotiating a raise.
Reduce Your Debt: Pay down existing debts to improve your debt-to-income ratio.
Save for a Larger Down Payment: A higher down payment can increase the amount you’re approved for.

Q) What Happens if My Mortgage Preapproval Expires?

A) Preapprovals typically last for 60 to 90 days. If it expires, you'll need to reapply, which may involve submitting updated documents and undergoing another credit check. It’s essential to keep your financial situation stable during this period to avoid any surprises.

Q) What are the Signs that the Loan Will Be Approved?

A) While preapproval is a good indicator, it’s not a guarantee. Here are some positive signs your loan might be approved:

Consistent Income: Steady employment and a predictable income stream demonstrate financial stability to lenders. Consistent income over a period reassures lenders of your ability to repay the mortgage.
Strong Credit History: A history of responsible credit use, including timely payments and low credit utilization, reflects your reliability in managing debt.
Adequate Down Payment: A larger down payment indicates financial discipline and reduces the lender's risk, potentially increasing the likelihood of loan approval.

Q) Can I Get Preapproved for a Mortgage with Bad Credit?

A) Yes, it's possible to get preapproved for a mortgage with bad credit, but it may come with challenges. Lenders may offer less favorable terms or higher interest rates due to the increased risk. To improve your chances:

Improve Your Credit Score: Take steps to pay off debts and correct any errors on your credit report.
Provide Strong Financial Documentation: Highlight stable employment, income sources, and a solid financial history.
Consider Government-Backed Loans: FHA loans, for example, are more flexible with credit requirements.

Working with a knowledgeable lender can help navigate these challenges and find the best path forward for your situation.

Key Takeaways

1. Importance of Mortgage Preapproval:

Preapproval is crucial for understanding your budget and focusing your home search.
It provides a competitive edge in real estate markets and streamlines the buying process.

2 Mortgage Preapproval Process:

Gather necessary documents like income proof and credit history.
Choose a reputable lender and submit your application for a credit check and financial review.
Upon approval, you receive a preapproval letter outlining your loan terms.

3. Common Misconceptions About Preapproval:

Preapproval does not hurt your credit score significantly.
It does not guarantee final loan approval or bind you to a specific lender.
The amount determined in preapproval is an estimate, not a fixed budget.

4. Preparing Your Finances for Preapproval:

Check and improve your credit score by paying bills on time and keeping credit card balances low.
Manage your debt-to-income ratio by paying down debts and considering ways to increase your income.
Save for a down payment and plan for additional expenses like appraisal and insurance.
Keep your financial situation stable by avoiding job changes and major purchases.