In 2022, an estimated 5.95 million homes were sold in the United States. While approximately 32% of the homes were purchased in cash, many of the remaining home sales involved a mortgage. If that’s the path you’re using, then getting a mortgage preapproval is typically a necessity. Here’s a look at what a mortgage preapproval is, how it differs from prequalification, and more.
What Is It, and How Does It Work?
A mortgage preapproval is a process for demonstrating your worthiness as a borrower without formally taking out a mortgage. You’ll provide specific personally identifiable information (PII) to a lender. The company then reviews those details to determine whether it’d likely approve your mortgage, issuing a letter stating it would if that’s the case.
During the mortgage preapproval process, you provide the same information as you would if you were actually moving forward with the mortgage. Generally, that involves contact details, income and debt information and supporting documents, and an agreement to undergo a credit check. Then, the lender verifies the information and conducts the credit check.
Once complete, the lender will review your information and provide a letter that says how much it’d probably be willing to lend based on what it’s learned. The preapproval letter is good for 60 to 90 days, giving a buyer plenty of time to find a suitable home and place an offer. However, the lender isn’t formally committing to the terms outlined in the letter, as the borrower’s situation can change between when the letter is issued and when the buyer is actually requesting a mortgage.
Is Preapproval Different from Prequalification?
Generally, a mortgage preapproval is considered more official than a prequalification. With a prequalification, the borrower provides some PII and receives an estimate of how much they’d potentially be able to borrow. However, the lender doesn’t go through the verification process it would if a borrower underwent a preapproval.
When a hard or soft credit pull occurs during a prequalification can vary, as lenders may use different processes. However, a preapproval almost universally involves a hard pull.
Who Needs a Mortgage Preapproval?
In many cases, having a mortgage preapproval is essential for aspiring buyers who intend to put a formal offer in on a home. Essentially, it shows the seller that the buyer has a strong chance of receiving a mortgage from a lender that’s large enough to support the offer.
In some cases, real estate professionals will only work closely with buyers who have a preapproval as well. In this case, it shows the agent that the buyer is serious about purchasing a home.
Mortgage Preapproval Quick Facts
Here are a few mortgage preapproval quick facts to keep in mind:
- Preapproval requires proof of employment, proof of income, and a hard credit pull.
- A preapproval isn’t a formal commitment by the lender to issue the mortgage. The lender can review any changes in the buyer’s financial situation or economic conditions that occur between the preapproval and the actual mortgage approval process before making an official decision.
- Preapproval letters don’t include the true monthly payment a borrower would have, as they don’t account for costs like property taxes and homeowners insurance.
- While the prequalification process may only take a few minutes to receive a letter, preapproval might take several business days, with some taking as long as 10 business days.
