You’ve finally found your dream home. It’s in the perfect neighborhood, near the perfect schools and has every amenity you were hoping it would. You've visited a dozen times and decided you’re ready. You want to make an offer. The only problem is you haven't been preapproved for a mortgage, and when you approach lenders about a loan, you discover it is vastly out of your price range.
Applying for a mortgage preapproval can eliminate time-consuming, emotionally jarring situations like these. By understanding exactly what you can afford, you will save time and stress and also find a realistic home that suits your needs.
What is a mortgage preapproval?
A mortgage preapproval is a written document from a lender that estimates the loan for which a borrower is likely qualified. According to HGTV, the preapproval document provides a good faith estimate for the interest rate, type of loan and the closing costs.
Most lenders now provide online preapproval applications, at least for the preliminary steps. An in-person follow-up will probably be necessary so the lender can review certain financial documents.
An important thing to keep in mind is that a preapproval is not a promise. Providing this good faith estimate does not in any way require the lender to give you a loan. Final approval will only happen if your financial situation doesn't change after you make an offer on a home and after the lender has fully appraised it to determine its value is in line with the asking price.
Many people find the difference between prequalification and preapproval confusing, but it is vital to understand they are not the same thing. HGTV explained prequalification is a more general estimate. It can take just a few minutes over the phone to get a prequalification estimate from a lender. All you have to do is provide some basic financial information. The lender will not check your credit history or do any sort of background check. On the other hand, a mortgage preapproval involves substantiating all of your information. Therefore, a preapproval is a far more accurate estimate and highly recommended over a prequalification.
Zillow explained that preapproval letters are generally valid for 60 to 90 days.
Why should you get a mortgage preapproval?
There are many benefits to getting a mortgage preapproval before you ever start shopping for a home - and there are many negative effects of not doing so. When you get a mortgage preapproval, you know exactly what kinds of homes to shop for. You can stop wasting time looking at houses beyond your current budget, and you can instead focus your search on homes for which you will likely be approved.
Realtor.com said real estate agents are far more inclined to work with someone who has been preapproved for a mortgage. That way, they know there is a greater likelihood of eventual loan approval, and they can also help you focus your search on affordable homes.
You will also be more appealing to sellers. Sellers will trust you can truly afford their home if you have the documentation saying so, and Realtor.com explained it may make sellers more open to negotiations regarding closing costs, asking price and more. Zillow said some sellers will even demand you provide a mortgage preapproval document along with your offer.
Other important things to keep in mind
HGTV urged homebuyers to get multiple mortgage preapprovals to compare offers and select the best one. Multiple approvals also place buyers in a position to negotiate because they increase competition among lenders.
The Home Buying Institute also suggested asking lenders if their fees are refundable if you don't end up taking out a loan from them. Preapproval fees vary widely across lenders. Some will let you apply for no charge at all to encourage you to work with them, while others may charge a few hundred dollars. Make sure to ask detailed questions about the fees and the possibility of waiving them.
If you do not get preapproved for a mortgage, Zillow offered a few tips to improve your financial situation before you try again. Improving your credit score and reducing debt are two great ways to increase your likelihood of mortgage preapproval. Make sure to double check your credit report for any errors that could have contributed to a reduced score. You can also consider raising the amount you are willing to pay for a down payment. This will help you receive a bigger loan. In addition, it is sometimes more difficult to get preapproved online. If you get rejected, meet with someone in person to discuss whether there is another way to get approved.