How To Get Preapproved for a Mortgage in 4 Steps - Slimmer Payments

How To Get Preapproved for a Mortgage in 4 Steps

If you’re starting to shop around for a home, you’re likely wondering, “How much house can I afford, anyway?” This is where mortgage preapproval comes in handy. Getting preapproved for a mortgage allows you to enter the homebuying process armed with the knowledge you’ll need to let sellers know you’re serious, and secure that final mortgage approval. 

What is a mortgage preapproval?

A mortgage preapproval is a written statement from a lender indicating that they’re tentatively willing to let you borrow a certain amount of money to purchase a home.

This is a crucial step in the home buying process, as it gives you an idea of how much house you can afford. Essentially, mortgage preapproval is a signal to sellers, real estate agents, and lenders that you’re serious about buying a home. 

Are mortgage preapproval and mortgage prequalification the same thing?

Short answer: no. Sometimes these terms are used interchangeably, but there are notable differences. In order to get prequalified, a lender will overview your income, assets, debt, and credit score, but you don’t have to provide any paperwork and there is no credit check. As such, you’ll receive an estimate of what you can afford, but not an exact number. 

Preapproval is more significant because it’s a more thorough/comprehensive process. Here, the lender will review your income and employment history (among other things), complete a credit check, and tell you exactly how much you can borrow. 

Keep in mind that if you anticipate your financial situation changing soon (i.e. you’re about to get a new job), prequalification may be the way to go.

Let’s take a look at the steps you need to take to get preapproved.

How to get preapproved for a home loan

Step 1: Check up on your credit

First, you’ll want to figure out where your credit score currently stands before reaching out to a lender. Luckily, you’re able to get your credit report for free from each of the three major credit bureaus (Equifax, Experian, and TransUnion). For a mortgage, lenders will want to see a credit score of at least 620. The higher your score, the better the rates you’ll qualify for. 

Be sure to dispute any errors you spot on your credit report, and clear up any delinquent accounts before you apply.

Step 2: Figure out your debt-to-income ratio

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes towards debts like student loans, credit card payments, or auto loans. Most lenders determine your loan amount by following the 28/36 rule, which says that your monthly mortgage payments should be 28% or less of your gross monthly income. Additionally, your total monthly debt payments (including your mortgage) should total 36% or less.

Step 3: Gather your documents

You’ll want to collect your personal information, such as social security numbers, current addresses, and employment particulars for you and any co-borrowers (if applicable). Also, you’ll need proof of income and bank and/or investment account information as well. During the preapproval process, lenders will want to see things like W-2s and/or 1099s. Lenders typically prefer two or more years of continuous employment, though there are exceptions. If you’re self-employed, be prepared to provide two years of income tax returns.

Step 4: Shop around multiple lenders

Experts recommend comparing offers from at least three lenders. This can help you compare rates and fees, and potentially save you bundles across the span of a 30 year mortgage. Going through the mortgage preapproval process does include a hard credit check, which will result in a slight impact on your credit score. FICO recommends confining these applications to a 30-day period to minimize the impact on your score.

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