In the world of homebuying, think of a mortgage pre-qualification as a learner’s permit, while a preapproval letter is a license to drive. A pre-qual letter can get you on the road to homeownership, but doesn't prove you can go the distance. With a preapproval letter, you’re in the fast lane.
Mortgage pre-qualification or mortgage preapproval?
Pre-qualification is a good first step when you’re not sure if you’re financially ready to buy a home. A mortgage pre-qualification is usually based on an informal evaluation of your finances. You tell the lender about your credit, debt, income and assets, and the lender estimates whether you can qualify for a mortgage and how much you may be able to borrow.
» MORE: See if you’re ready with our mortgage pre-qualification calculator
A mortgage preapproval is more than an estimate; it’s an offer by a lender to loan you a certain amount under specific terms. The offer expires after a particular period, such as 90 days.
“A mortgage preapproval is more than an estimate; it’s an offer by a lender to loan you a certain amount under specific terms.”
With a mortgage preapproval, a lender pulls your credit report and reviews documents to verify your income, assets and debts. If you’re confident about your credit and financial readiness to buy a home and you’re ready to start shopping, then you might skip the pre-qualification step and go straight to preapproval.
» MORE: Learn more about the difference between pre-qualification and preapproval
Steps to getting a mortgage preapproval
Get your free credit score. Know where you stand before reaching out to a lender. A credit score of at least 620 is recommended, and a higher credit score will qualify you for better rates. Generally a credit score of 740 or above will enable most borrowers to qualify for the best mortgage rates.
Check your credit history. Request copies of your credit reports, and dispute any errors. If you find delinquent accounts, work with creditors to resolve the issues before applying.
Calculate your debt-to-income ratio. Your debt-to-income ratio, or DTI, is the percentage of gross monthly income that goes toward debt payments, including credit cards, student loans and car loans. NerdWallet’s debt-to-income ratio calculator can help you estimate your DTI based on current debts and a prospective mortgage. Lenders prefer borrowers with a DTI of 36% or below, including the mortgage, though it can be higher in some cases.
Gather income, financial account and personal information. That includes Social Security numbers, current addresses and employment details for you and your co-borrower, if you have one. You’ll also need bank and investment account information and proof of income. During preapproval, you’ll likely have to submit your W-2 tax form, 1099s if you have additional income sources and pay stubs. Two years of continuous employment is preferred, but there are exceptions. Self-employed applicants will likely have to provide two years of income tax returns. If your down payment will be coming from a gift or the sale of an asset, you’ll need a paper trail to prove it.
Contact more than one lender. You may find that one lender makes it easy to apply for a preapproval online, whereas a local lender may work with you to remove barriers to your approval. Contacting more than one lender can help you find the right financial partner for your situation, and could save you money. Comparing lenders for an average-size home loan could save $430 in interest, on average, in the first year, or $9,200 total over the 30-year mortgage, according to NerdWallet’s 2019 Home Buyer Report. And applying for preapproval from more than lender to shop rates typically shouldn’t hurt your credit score. FICO, one of the largest U.S. credit scoring companies, recommends confining those applications to a limited time frame, such as 30 days.
» MORE: See the documents you’ll need for getting a mortgage approval letter
A mortgage preapproval is no guarantee
With a preapproval in your pocket, real estate agents and home sellers know that any offer you make is legit. It’s as close as you can get before your mortgage application goes through the underwriting process.
But it’s not a guarantee. The lender’s offer might not stand if your financial situation changes. And other steps, such as a home appraisal, must be completed before a loan can close.
» MORE: See what not to do during mortgage preapproval