Getting preapproved for a mortgage is a crucial step in the home-buying process.
And it should be among the very first you take — getting preapproved gives you an idea of how much you can borrow. It lets sellers know you have the borrowing power to back up an offer you make to buy their home. It tells real estate agents, who work on commission, that spending time on you could well pay off with a transaction. And it alerts lenders that you’re a savvy borrower who may soon be taking out a mortgage loan.
In short, getting preapproved for a mortgage signals that you’re serious about buying a home.
Why get preapproved for a mortgage
When you decide to buy a home, it can be tempting to pull up listings on your computer and schedule appointments to see your favorite houses before filling out a mortgage application. But if you don’t already have a preapproval letter in your pocket, that can be a mistake. Taking the time to get preapproved can give you an advantage over potential buyers who aren’t preapproved. Here’s how.
You’ll get a better idea of how much you can borrow
When you’re housget preapproved for a mortgagee hunting, it’s easy to get caught up in the excitement of the search and look at homes that are outside your budget. Getting preapproved can help you set realistic expectations about what you can afford for a monthly mortgage payment. You’ll have a conditional green light from the lender for a specific loan amount, so you can focus on homes in that price range.
That doesn’t mean you have to borrow the maximum, though — and in many cases, it’s probably a good idea that you don’t. That’s because many mortgage lenders use your gross (not net) monthly income as a factor in determining how much you qualify for. Your lender generally doesn’t consider your daily living expenses — things like groceries, utilities, childcare, healthcare or entertainment — in their calculations.
It’s up to you to review your budget to make sure the loan amount is one you’re comfortable with. Don’t rely on your lender completely to tell you what you can afford.
Your offer might be more competitive
If you have a preapproval letter, it lets sellers know a lender has reviewed your current financial situation and conditionally determined you can afford to buy a house. This gives sellers confidence that the process is unlikely to get derailed because you can’t secure financing.
You’ll be alerted to potential problems
Each lender’s process is different, but they will generally review your credit history, income, assets and debts before granting a preapproval. What they uncover can alert you to potential problems that may prevent you from obtaining a mortgage.
That may mean paying down debt to improve your debt-to-income ratio, saving for a larger down payment or resolving inaccuracies on your credit reports. Whatever it is, if you go through the preapproval process, you can take care of the issue before you begin your home search. If not, you could be in for an unpleasant surprise when you make an offer.
How to get a mortgage preapproval
Now that you have an idea of why it’s important to get preapproved, here’s what you need to do to make it happen.
Gather the appropriate documents
Lenders will want to verify your identity, credit history, employment history, income and financial assets to issue a preapproval. They’ll likely ask you to fill out a uniform residential loan application (almost everyone calls it a 1003 or “ten-oh-three” —
The 1003 application asks for your personal information, financial information and loan information, including …
- Bank accounts, retirement and other accounts
- Any other assets you have
- Property you own
- Income and employable details
- Employer contact information
- Debts you owe or other liabilities
Your lender will also likely do a hard credit inquiry, and may require additional documents based on your individual situation, such as pay stubs, tax returns or bank statements.