What Is a Preapproved Home Loan?
An preapproved home loan means a lender has evaluated your credit and financial situation and preapproved you for a mortgage up to a certain amount before you start house hunting. This gives you a few key advantages in today’s competitive housing market.
For one, it shows home sellers you’re serious. With a preapproval letter in hand, the seller knows you have the means to actually follow through with a purchase.
Benefits of Getting Preapproved For a Mortgage
Getting preapproved for a mortgage before you start house hunting comes with some major perks. They include:
1. Save Time House Hunting
When you’re preapproved, you’ll know exactly how much house you can afford so you can focus your search and make strong offers. No more falling in love with homes outside your budget. Preapproval also shows sellers you’re serious, so your offers may be taken more seriously.
2. Stronger Negotiating Position
With preapproval, you’re in a better position to negotiate the best deal. Sellers and real estate agents will know you’re ready to move quickly. They’ll be more motivated to accept your offer over others without preapproval.
3. Lock in a Good Interest Rate
Interest rates change all the time. Getting preapproved locks in your rate for a period of time, often 60-90 days. This protects you from rate hikes so you can snag a lower monthly payment. If rates drop, you can usually re-lock at the lower rate.
4. Avoid Delays at Closing
Preapproval means your lender has already reviewed your credit, income, and down payment. So at closing, there are no last minute surprises to stall the process. Your closing can move forward smoothly without delays from the lender’s end.
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How to Get Preapproved for a Home Loan
Here are the steps to follow to get preapproved for a home loan:
1. Apply with a Mortgage Lender
Applying for preapproval with a mortgage lender, such as a bank, credit union, or mortgage broker, is the first step. Information about your earnings, job, assets, and debts will be required of you. To determine your eligibility and interest rate, the lender will review your credit report and score.
2. Turn in the necessary paperwork
Be ready to provide documentation, such as paychecks, tax returns, W-2s, and bank statements, attesting to your job and income. In order to ascertain how much you can afford for a monthly mortgage payment, the lender will want to see your real income and expenses. Also, gather the documentation for any sizable assets you own, such as investment accounts.
3. Find Out How Much You Can Borrow
The lender can give you a preapproval letter that indicates the maximum mortgage amount they would offer you based on your application and supporting documentation. This sum is determined by your credit score, assets, obligations, income, and mortgage type. Have a meeting with your lender to figure out what range of homes you can afford.
4. Look for Houses Within Your Price Range
Having obtained a preapproval, you may confidently begin your house search, knowing that you are already eligible for a mortgage within a particular price range. The seller will know you’re serious when you make an offer on a house you love. On the other hand, avoid making an offer on a home that exceeds your preapproved limit because your mortgage could be rejected.
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What to Expect After You’re Preapproved
Here’s what you can expect next:
1. House hunting
Now you can look at properties with confidence, knowing roughly your price range and terms. Work with your real estate agent to view homes that match what you were approved for. Make offers on places you’re interested in, but don’t make any final decisions just yet.
2. Final approval
When you have an accepted offer on a house, the lender will do another review of your finances and the property details to grant final approval. They’ll verify your down payment, income, employment, and other details haven’t changed. They’ll also assess the property’s appraisal and if it’s sufficient for the loan amount. At this stage, the interest rate and terms of your loan will be locked in.
3. Signing official paperwork
If everything checks out, you’ll sign an official set of mortgage paperwork, like the final promissory note for the amount of your loan, as well as disclosures and other legal documents. This typically happens at a title company or closing agent’s office, where the seller will also sign over the deed to the property to you.
4. Closing the deal
At the closing or settlement, you’ll provide your down payment and closing costs, the seller will sign over the deed, and the lender will record the mortgage or deed of trust. The property is officially yours—congratulations! You now have the keys and can start moving in and making the place your own.
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Conclusion
Getting preapproved for a home loan in advance puts you in a great position to get the house you really want. Take the time to find a reputable lender and submit a meticulous application. With the right preparation, you’ll be settling into your new home in no time.
FAQ’S
Here are answers to some of the most common FAQs about getting preapproved for a mortgage.
1 How does preapproval differ from prequalification?
Preapproval and prequalification are not the same. Prequalification is a quick estimate of how much you may be able to borrow based on limited information. Preapproval involves a more thorough check of your credit, income, debts, and down payment funds. You’ll receive an official approval letter for a specific loan amount. Preapproval holds more weight with sellers and can give you a competitive edge.
2. Do I have to go with the lender that preapproved me?
No, a preapproval letter is not a binding contract. You can shop around at other banks and lenders for the best mortgage offer for you within the preapproval window. The preapproval simply confirms you meet the qualifications for a loan amount, it does not lock you into using that particular lender.
3. How long is a preapproval valid?
Most preapprovals are valid for 60 to 90 days. If you find a house and make an offer within that window, the preapproval should still be honored. However, rates and programs can change, so for the strongest offer, start your preapproval process again 90 days before you anticipate buying. That way you’ll have an up-to-date approval letter when you need it.
4. Will preapproval hurt my credit score?
Preapproval does involve a credit check, but as long as you limit checks to only a couple of lenders within a short period of time, the impact on your score should be minimal. Multiple hard inquiries can lower your score slightly. But getting preapproved, and taking on a mortgage, can also help build your credit over the long run as long as you make on-time payments.
5. Do I need a down payment to get preapproved?
Most lenders will require you to verify you have funds for at least a 3% to 20% down payment before they will preapprove you for a mortgage. The more you can put down, the better the terms and interest rate you may be offered. However, some first-time homebuyer programs allow for little to no down payment. Check with lenders about options like FHA loans, VA loans, and down payment assistance programs
