What is a mortgage preapproval, and how long does it last?

Summary

What is a mortgage preapproval? 

A mortgage preapproval is a written indication, usually in the form of a letter from a bank or lender, stating how much it might be prepared to lend you up to a certain limit.

A preapproval letter is not binding. A lender could still refuse to lend you the money, or you could decide to go with another provider. However, it’s a useful indicator of what you can borrow, and while you don’t always have to have one, real estate agents and realtors take them seriously. 

It’s important to remember that mortgage preapproval letters have expiration dates. The offer usually expires after a certain amount of time, such as 30 or 90 days. It is also only valid if you meet the specific terms it sets out.

A mortgage preapproval is different from prequalification. A prequalification is more informal and gives you an idea of how much you can borrow.

How do I apply for a mortgage preapproval?

Applying for mortgage preapproval is a detailed process, so it’s important you have all your documents in order before you make the application.

Here is what you need to do to apply for mortgage preapproval:

To successfully apply for a mortgage, you need a good credit score.

Before your potential lender checks your score, it’s wise to check it yourself a few months prior and clear up any inaccuracies.

A credit score of at least 620 is recommended to qualify for a mortgage, and a higher one will qualify you for better rates.

You must provide W-2 wage statements, tax returns, and payslips that show current and year to date income when applying for mortgage preappproval.

Lender will also ask to see proof that you have enough money for the downpayment on your property by looking at your assets. This can include bank and investment account statements.

Lenders will also take a look at your debt-to-income ratio, or DTI.

This is how much of your gross income goes toward debt payments, such as student loans, car loans, or your credit card.

Lenders prefer borrowers with a DTI of 36% or below.

Alongside your financial information, you will also need to provide personal documentation, including your Social Security number, current address, employment details, and identification, such as your passport or driver's license.

There usually won’t be any charge from a lender or a broker for a mortgage preapproval, and a broker will typically charge you once your mortgage deal is secured. 

It’s important to remember that while this may seem like a detailed process, it’s wise to get preapproval letters from multiple lenders, allowing you to pick and choose the best provider for your needs.

If you want to take a look at your finances and work out if buying a property is on the cards, it’s best to work with a professional. A financial advisor can review your finances and help create a financial plan that will help you hit your goals. You can connect with an advisor perfectly suited to your needs via Unbiased. Get started here.

Do I need a mortgage preapproval? 

Having a mortgage preapproval isn’t compulsory, but there are several good reasons for getting one done. 

A mortgage preapproval gives you a clear idea of what you can afford, so you know your potential buying power and limits. Sometimes, you can afford a more expensive property, while occasionally, your ambitions must be slightly scaled back. 

Some realtors and sellers will only take your offer seriously if you have a mortgage preapproval. By showing what you can expect to borrow, it reduces the risk that you’ll apply for a mortgage and be rejected. 

A mortgage rejection is bad for your credit file, as it can make your next application even harder. A mortgage preapproval application gives you a “dry run” with less risk attached. 

When should I get a mortgage preapproval? 

It’s best to apply for a mortgage preapproval as soon as you’ve decided to start looking for a property.

Knowing what you can afford, even theoretically, will help you confidently look for a property.  

Some lenders will give you a letter when they offer a mortgage preapproval, which can be useful to show to realtors. 

What this entails may differ by lender but could include:  

Will applying for a mortgage preapproval affect my credit rating? 

As mentioned, a mortgage preapproval requires a credit check, usually a hard inquiry instead of a soft one.  

A soft inquiry checks against your file without leaving a “footprint.” This check won’t be visible to other lenders, so it shouldn’t affect your credit file. 

A hard inquiry shows on your file as an application for credit and can impact your credit score.  

If many hard inquiries are made on your file within a short time, the credit scoring system may see them as a single event as long as you make them within a few weeks of each other. However, if they’re spread out over a longer period, lenders looking at your credit history for your mortgage application may think you’ve been rejected for credit several times and could choose not to lend to you. 

Remember, it’s good practice to check your credit file regularly. It’ll give you time to sort out any problems or to add a note to your file if something from your financial past could affect it. 

Mortgage preapproval: what can go wrong? 

You can be declined when applying for a mortgage preapproval, which can harm your credit score. 

Reasons for a rejection include:

Even if your mortgage preapproval is accepted, your full application could be rejected later. For instance, if the lender only made a soft inquiry, this may not have revealed everything in your credit file. Other information may come to light in a hard inquiry for a mortgage application. 

Nevertheless, this is a good opportunity to iron out any potential problems. 

How long does a mortgage preapproval last? 

Depending on the lender, a mortgage preapproval can be valid between 60 and 90 days. 

You may need to get another if you haven’t found a property or had an offer accepted. Renewing it should be straightforward unless your or external circumstances, such as the economy, change significantly. 

Remember that if any details you give when applying for the mortgage preapproval change during the validity period, you should check with your broker or lender to ensure it is still valid and renew the application if necessary. 

Get expert financial advice

If you’re trying to get on the housing ladder, it might be worth getting independent financial advice, as this can help when saving and planning for the future. 

If you’re buying a home or starting the process, a financial advisor can help you develop a plan that works for your finances.

Unbiased can match you with your perfect financial professional. Get started today.