Mortgage Preapproval: What It Is, Benefits, and Considerations

Buying a home is one of the biggest financial decisions you’ll make, and understanding your budget before you start house hunting can help make the process smoother. That’s where mortgage preapproval comes in.

We’ll break down what mortgage preapproval is, why it matters, and how to get preapproved, so you can begin the homebuying process with confidence.

What Is a Mortgage Preapproval?

A mortgage preapproval is an estimate of how much money you may be able to borrow to buy a home. During the preapproval process, lenders evaluate factors like your income, credit history, debts, and assets to determine the loan amount you may qualify for. Getting preapproved can help you narrow your home searchand focus on homes within your budget. It can also show sellers you’re a serious buyer.

When a lender preapproves you for a mortgage, they typically review your:

• Credit score and credit history
• Income and employment
• Assets and savings
• Debt-to-income (DTI) ratio

After an in-depth review of your finances and documentation, the lender may provide a preapproval letter stating the loan amount you are approved to borrow provided your circumstances don’t change and contingent on your property type and valuation. Many mortgage preapprovals remain valid for about 60 to 90 days, although timelines can vary by lender.

Mortgage Preapproval vs. Mortgage Prequalification

Mortgage preapproval and prequalification are often confused, but they’re not the same thing. Here’s a quick look at some of their key differences:

Mortgage prequalification can help you estimate a budget early in the process, while preapproval can be more useful once you begin seriously shopping for a home. Because preapproval involves a more detailed review, some sellers may feel more confident accepting offers from preapproved buyers.

Note: Freedom Mortgage offers prequalification, which involves a hard credit pull that could have a small, temporary impact on your credit score.

Preapproval vs. Final Approval

Mortgage preapproval also differs from final approval. Preapproval serves as a tool to help you when you’re shopping for homes and considering making offers. Final approval, or clear-to-close, occurs after you find a home and have an offer accepted. It means underwriting is complete and the loan is approved, provided all remaining conditions are met.

Key Benefits and Considerations of Mortgage Preapproval

Mortgage preapproval can provide several advantages when you’re preparing to purchase a home.

• Understand your homebuying budget: Preapproval can help you estimate how much home you can afford, narrow your search, and prevent disappointment later if you fall in love with something that’s actually out of your price point.
• Strengthen your offer: In competitive housing markets, preapproval can boost your credibility when making an offer. Sellers may prefer buyers who are preapproved because it suggests financing is more likely to proceed successfully.
• Identify potential financial issues early: The preapproval process may reveal issues that could affect your mortgage application, such as high debt levels or credit concerns. Discovering these issues early can give you time to improve your finances before moving forward.
• Speed up the closing process: Since some financial review work is typically completed during preapproval, the mortgage and closing process may move more efficiently after your offer is accepted.

It’s also worth keeping these considerations in mind when seeking mortgage preapproval:

• It’s not a guarantee: Preapproval is contingent on whether the property you choose passes an appraisal and a final review of your finances.
• It has an expiration date: Preapproval letters generally last 60 to 90 days. If you haven’t found a home during that time, you’ll need to update your documents with your lender. This will probably mean another hard credit pull.