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In the world of homebuying, think of a mortgage pre-qualification as a learner’s permit, while a mortgage preapproval is a license to drive. A pre-qualification 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. It lets real estate agents and home sellers know you are serious about buying a home.
Is a pre-qualification the same as 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
Preapproval is the next step if you get a thumbs up during pre-qualification. During the mortgage 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 might skip the pre-qualification step and go straight to preapproval.
A mortgage preapproval is 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.
Preapproval is not a guarantee you will be given 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.
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.
» MORE: Learn more about the difference between pre-qualification and preapproval
What is a preapproval letter?
Once preapproved, your mortgage lender will issue a preapproval letter. This document indicates the type and amount of loan for which you're approved, among other things. A preapproval letter indicates to both real estate agents and home sellers that you're financially able to buy a home, and it's expected that a preapproval letter will accompany any offer you make.
How to get preapproved for a home loan
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. 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. 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. Comparing offers from multiple lenders can help you compare rates and fees and save you thousands of dollars over a 30-year mortgage. Going through the mortgage preapproval process 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: Get preapproved for a mortgage