What is a Preapproval?
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May 14, 2021
What is a preapproval?
Good news — you got your mortgage preapproval letter, which means you've proceeded to the next round in the field of home buying. So, where does that leave you? With a preapproval, you'll be considered as a serious player in the home-buying game since a lender has:
- Assessed your income, debt, credit report, and assets
- Determined a certain amount you'll be eligible to borrow, as well as a potential interest rate and monthly payment
What's the difference between a prequalification and a preapproval?
Getting a mortgage prequalification is the step you take before getting a preapproval. During the prequalification process, you:
- Submit financial information such as your income, debt, and assets to your lender.
- The lender reviews your information, pulls your credit score, and provides you with a ballpark figure of how much you might be able to borrow for a home loan. This estimate differs from the specific amount provided to you with a preapproval.
At this point, your information has been reviewed, but not verified.
Why do you need a preapproval?
Curious about why you should take this step and what the potential benefits of getting a preapproval are? Remember, with a preapproval letter in hand, you can show a seller you're a serious potential buyer because a lender has determined you have the financial means to purchase a home. Making this effort can provide a seller with peace of mind if the purchase progresses.
Plus, a preapproval letter can keep you on track when it comes to looking for a house you can afford. This may help you avoid getting your heart set on a house that's not quite in your price range.
How do you get a preapproval letter?
To get a preapproval letter, you'll likely need to provide your lender with the following:
- Proper verifiable identification
- Income verification including: W2 forms from at least the last two years, pay stubs from the last 30 days, proof of all additional income sources, income tax returns from at least the last two years
- Asset verification including: Bank statements for all accounts and your most recent retirement savings account statements
How long does it take to get a preapproval letter?
Variables such as how much debt you have and whether your finances are complex may impact when you can expect to receive your letter. Getting a preapproval within 24 hours or the next business day is possible, however.
Does a preapproval mean you're guaranteed to get a mortgage?
A preapproval letter indicates a lender's willingness to do business with you because your financial information was assessed and verified — but it doesn't guarantee you'll get a mortgage.
Another important point to consider is that a preapproval letter is typically valid for 60-90 days. Since your financial situation could change during that time, a preapproval doesn't serve as a guarantee that you'll receive a mortgage.
At what point should you get a preapproval?
You should aim to get your preapproval letter once you get close to making an offer on a home. That should give you enough time to compare mortgage rates to find what would work best for you and be ready to make an offer before your preapproval would expire.
Does a preapproval hurt your credit score?
A preapproval is a hard pull on your credit, but it shouldn't affect it significantly while you're planning to purchase a home. Generally, a pull or even multiple pulls for a specific type of credit, such as a mortgage, tend to have less of an effect on your credit score than pulls from different sources. A variety of pulls could imply to your lender that you've opened several lines of credit — probably not the best financial decision when you're planning on buying a house.
Approaching the Final Stretch
Building your knowledge of the preapproval process can help you step up your game when you're ready to make that offer.
To learn more PenFed loans or what loan is right for you:
- Call 866-386-7254
- Visit the Mortgage Center