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HOW TO GET PREAPPROVED
By the ZeroDown Team
November 1, 2022 / 11 minute read

How to get preapproved for a mortgage?

The property buying journey can be intimidating. If you’re considering purchasing your first home, you may be wondering where to start. A mortgage preapproval is the perfect solution to help you gain confidence and clarity while searching for a home.

Understanding how to get preapproved for a mortgage seems complicated at first. However, with a bit of organization and our helpful tips you will be ready to move in before you know it.

Contents


What is a mortgage preapproval?
Why should you get a mortgage preapproval?
What's the difference between preapproval vs prequalification?
Tips for applying for a mortgage preapproval
What is checked during preapproval?
Other factors impacting preapproval?
Helpful tips for mortgage preapproval
Mortgage preapproval FAQs
The bottom line

What is a mortgage preapproval?

A mortgage preapproval is a process in which a lending institution takes a thorough look at your finances to decide if you are eligible for a mortgage. They will also be able to give you a fairly accurate estimate of how much you should be able to spend on a property.

Keep in mind that a mortgage preapproval is not a guarantee. You should think of it like a rehearsal before applying for a real mortgage.

Once your lender pre-approves you, you'll then receive a pre-approval letter. This will contain the following information:

  • Your mortgage amount
  • Your interest rate (which will vary depending on the state of the housing market)
  • Any additional details pertaining to the loan

The pre-approval will be a useful tool for your real estate agent as they assist you throughout the buying process. It allows them to understand your budget while also assuring them you're serious about making this major purchase.

It also serves as a confirmation that you likely won't have any roadblocks arise later when attempting to get a mortgage. This is music to a lender's ears as they don't like unpredictable buyers. The pre-approval lets them know they can expect smooth sailing after your bid is accepted.

Why should you get a mortgage preapproval?

If you are like most people, you will not buy a house outright. If you are at the point where you are seriously considering buying a house, you should get a mortgage preapproval. Here are a couple benefits of preapproval.

It shows the seller you are a serious buyer

A mortgage preapproval is often a requirement when going through the buying process. Agents and buyers want to know that they are not wasting time with someone that has no potential of being able to finance the purchase.

It can show you where you need to improve

A preapproval will dive deep into your finances and show what you need to work on to be eligible and maximize a mortgage. It will show you weak spots in your finances that you can address and improve to make yourself a more attractive candidate.

What's the difference between preapproval vs prequalification?

You will often hear the term mortgage prequalification used. Sometimes it’s used interchangeably with preapproval, depending on the lending institution. Usually, prequalification is different from preapproval.

Prequalification is a shallow look at your finances using fewer metrics. It almost never includes a deep look into your credit score. It’s often based on estimated income alone.

You will see the term, prequalified, a lot in various advertisements, emails, and mail campaigns. Regardless of the name, if you’re not digging deep into your finances, including a credit score, you’re not receiving a true preapproval and it will not be enough to satisfy agents and buyers.

Looking for homes for sale near you, look no further

Tips for applying for a mortgage preapproval

The process for preapproval is generally not very difficult or long, however it does require organization as you have a few elements to consider at the same time. Follow these steps when applying for preapproval.

Plan your timing

Timing is important because your preapproval is valid for 30 - 90 days (sometimes up to 6 months). Only ask for a preapproval if you are serious about buying a property.

You can apply to multiple lenders for preapproval in the same period without it hurting your credit score. However, after that period it’s not advisable to request a credit score often as that will negatively affect your score.

It's important to be serious about the process. If you are not approved, you should address the issues that prevented your preapproval. This will give you confidence the next time you apply.

Collect your documents

You will need to provide many documents during the preapproval process. Some of the things you will be asked for include, but are not limited to:

  • Proof of identification
  • Income tax returns
  • Proof of employment
  • Proof of assets
  • Bank statements
  • Statements of investments
  • Debt statements
  • Financial statements regarding divorcee when applicable
  • Gift letter if you are receiving money for the down payment as a gift

Submit your documents and wait

After you have submitted your application for preapproval you could wait anywhere between 1 day or a few weeks. The most common waiting time is 3 days. The wait time for preapproval depends on the complexity of your finances.

Preapproval letter

Once everything is confirmed you will receive a preapproval letter that you will need to show agents and sellers. In addition to your personal information a preapproval letter will typically give details on your loan program, total loan amount, and expiration date.

Apply for pre-approval

What is checked during preapproval?

When you have submitted your application for preapproval a process of due diligence is done on the part of the lending institution to ensure that the information you have provided is accurate.

Property information and purpose of loan

The mortgage lender will want property information to make sure you are not overpaying for the house. This ensures them that in case you default on your mortgage, they get a property that is worth what you claim. In any case you will want to make sure your property is estimated correctly for your own wellbeing.

Monthly income

It's standard procedure to make sure you have a monthly income capable of covering the cost of the mortgage. When applying you should be ready to provide information like pay stubs and work contracts. If you are self-employed, it’s common that the lending institution will require more proof of income. This can sometimes be previous tax statements or client invoices dating back a year.

Assets and Liabilities

A full inventory of assets will be needed to get a clear picture of your financial state. The same is true of any financial liabilities. A financial liability is any financial obligation that you have that could affect your finances. This could include a divorce alimony or child support.

Other factors impacting preapproval?

There is a common misperception that mortgage preapproval is based solely on salary. This is not true. There are many factors that affect your ability to lend money.

LTV or Loan To Value Ratio

This ratio stands for loan to value ratio and is expressed in a percentage. It's a ratio based on the amount of your mortgage and the property value. Your down payment affects this ratio. With a higher down payment giving you a better LTV ratio. For example, if you pay $20k down on a $200k home, your LTV ratio is 90%.

DTI or Debt To Income Ratio

This is often considered one of the most important factors in mortgage preapproval. This ratio is based on how much you pay out to how much you earn.

DTI ratio is also expressed as a percentage. There are two types of DTI.

  • Front-end DTI: shows how much of your income goes towards housing expenses. This ratio should not exceed 28%.
  • Back-end DTI: shows how much of your income goes toward all expenses. This ratio should not exceed 40%.

If you are not preapproved, you may find that you are required to pay off some outstanding debts or lower your DTI ratio in another way.

Credit History and Credit Score

Credit scores are done through one of three credit agencies: Equifax, Experian or TransUnion.

Credit scores vary depending on the model but the most common is expressed as a FICO score. You want to have a FICO score of at least 700.

Employment history

Being able to prove that you have a stable work salary and reputable employment history is important in the preapproval process.

Helpful tips for mortgage preapproval

You don’t have to wait until the preapproval process. Take a good look at your finances and make some changes today to make yourself a strong candidate.

Tip 1: Build strong credit

The most important step you can take in building strong credit is consistently paying your bills on time. Late fees are not the only deterrent to paying your credit card bills late. Those late payments will be reflected in your credit score.

Tip 2: Pay off as much debt as possible

The most important step you can take in building strong credit is consistently paying your bills on time. Late fees are not the only deterrent to paying your credit card bills late. Those late payments will be reflected in your credit score.

Tip 3: Ask your lender for advice

If you have a good relationship with your lender, ask them for advice. They may be able to give you pointers that are specific to their lending institution.

Tip 4: Apply with several lenders to compare offers

A great way to maximize your lending potential is to apply with several lenders at the same time. You can use this as a negotiating technique. Remember to do this at the same time so the preapproval process does not impact your credit score.

Tip 5: Be realistic about what you can afford

Luckily, ZeroDown has created a handy mortgage calculator so you can get a better idea of what your monthly bills will look like.

Apply for pre-approval

Mortgage preapproval FAQs

Will my credit score be affected by preapproval?

Yes, your credit score will be affected by preapproval. You can expect your credit score to be decreased by around 5 points or less. Therefore, it’s not advisable to do the preapproval process too often. You should be serious about the home buying process when performing a preapproval.

My preapproval was rejected, what do I do now?

If your mortgage preapproval is rejected, you should speak to your lender and ask them what you can do to improve your financial forecast. Often, lenders will advise you to pay off outstanding debts.

What is the most important factor in mortgage preapproval?

Although there are several factors affecting your mortgage preapproval, the single most important factor is your DTI ratio. The total sum of your monthly expenses to monthly income is going to play the largest role in your mortgage preapproval.

Can you get denied a mortgage after being preapproval?

Mortgage preapproval does not guarantee that you will be approved for a loan. Your financial situation is regularly updated. If you were preapproved but your credit score has taken a hit recently, you could be denied a loan.

How long is a preapproval valid for?

A mortgage preapproval is typically valid for 90 days although some will be considered for up to 6 months. This is because interest rates are constantly changing, and credit scores are updated monthly. You will want to contact your lender if you haven’t found a home within your mortgage preapproval’s window of validity.

You can read more about how long a preapproval is valid for here.

The bottom line

Don’t let the preapproval process stress you out. Follow our tips to make sure your finances are in top shape. Buying your first home is an exciting process.

If you are in a situation where you are having trouble getting preapproval and need time to build credit you should consider a rent-to-own home from ZeroDown. A rent-to-own structure can give you time to build credit, pay off debts, and start saving for a down payment.

In addition to building your credit there are many benefits to rent-to-own properties. To learn more about this unique buying structure click here and don’t forget to check out our property listings here.

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