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Scrolling through glossy online listings may fuel your dream-home fantasies, but the homebuying process begins in earnest when you contact a lender and get preapproved for a mortgage. Although it’s nonbinding, mortgage preapproval reveals how much a lender is willing to let you borrow and what kind of mortgage you may be eligible to receive. Once this process is complete, the lender will provide you with a preapproval letter.
You can get similar information regarding your estimated borrowing limit by going through pre-qualification, which is an informal process involving self-reported financial data. Preapproval, on the other hand, is substantiated by financial documentation, which is why a preapproval letter from a lender is meaningful. Pre-qualification can be a helpful way to establish a realistic budget, while a preapproval letter lets real estate agents and home sellers know that you’re able to obtain financing and are ready to buy a home.
Once you’ve tracked down all the necessary information, you’re ready to start researching lenders that may be a good fit. Many of them have a preapproval portal on their websites.
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You’ll need to gather documentation to get preapproved, including Social Security numbers, proof of income, banking information and tax forms. (Use a preapproval documentation checklist.)
You’ll want to get your financial ducks in a row before applying. This can include disputing incorrect data on your credit report or paying off some existing debts to signal to lenders that you can afford a mortgage.
Pre-qualification is a more casual and informal way to gauge your readiness to buy a home, while preapproval is a more involved process that is best suited to borrowers who are ready and motivated to buy.
Your preapproval will likely expire in three months or less.
5 steps to get preapproved for a home loan
Get your free credit score. It’s helpful to know where you stand before reaching out to a lender. A credit score of at least 620 is recommended to qualify for a mortgage, and a higher one will qualify you for better rates. Generally, a credit score of 740 or above will enable you to qualify for the best mortgage rates. You’ll want to get your score as high as possible before embarking on the homebuying journey, but you can also focus on lenders that specialize in working with borrowers with low scores if needed.
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 prospective mortgage payment, though it can be higher in some cases. If your monthly debts are prohibitively high, you may need to address this by refinancing, getting on an income-based repayment plan or paying down your debt more aggressively before you take on a mortgage.
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. Documents you’ll need to get a mortgage preapproval letter include your W-2 tax form and 1099s if you have additional income sources and pay stubs. Lenders prefer two years of continuous employment, 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. Comparing offers from multiple lenders can help you compare rates and fees and save you thousands of dollars over a 30-year mortgage. Because preapproval involves a hard inquiry, your credit score may experience a slight (but temporary) hit. However, because all of your applications pertain to one loan, you’ll get dinged only one time, rather than getting penalized for every lender that grants you preapproval. FICO, one of the largest U.S. credit scoring companies, recommends confining those applications to a limited time frame, such as 30 days.
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Preapproval is not the same as pre-qualification
Pre-qualification is a good first step when you’re not sure whether 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. You can see if you’re ready with our mortgage pre-qualification calculator.
Preapproval is the next step if you get a thumbs-up during pre-qualification. During the preapproval process, 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 may skip the pre-qualification step and go straight to preapproval.
» MORE: Learn more about the difference between pre-qualification and preapproval
How far in advance should I get preapproved for a mortgage?
Mortgage preapproval is an offer by a lender to loan you a certain amount under specific terms. The offer expires after a certain amount of time, such as 30 or 90 days. It’s important to read the fine print and be aware of how long your preapproval letter is valid, but in any case, you should apply when you’re ready to start seriously looking for homes and are prepared to make an offer.
Preapproval is not a guarantee you will receive a loan, and the mortgage can still be denied. A home appraisal must be completed before a loan can close to ensure you aren’t paying more for the home than it’s worth. Also, the lender’s offer may not stand if your financial situation changes between preapproval and closing.
This is why it’s crucial to avoid any financial moves after preapproval that could make you appear riskier to lenders. Things not to do after you are preapproved for a mortgage include applying for new credit, making large purchases or missing loan and credit card payments.
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