Can You Make an Offer on a Home Without a Preapproval Letter?
Including a mortgage preapproval letter when you bid on a home communicates to the seller that you're serious about going through with the purchase, and that you've got financing lined up to close the deal. While a preapproval letter isn't an explicit requirement, it can give you an edge over other potential buyers, especially in a competitive housing market.
Here's what to know about a preapproval letter, and whether to include one with your offer on a home.
What Is a Preapproval Letter?
A preapproval letter is a document provided by a mortgage lender that indicates how much money you qualify to borrow for a home purchase, and at what interest rate and loan term. The letter is typically valid for 30 to 90 days, depending on the lender.
How Preapproval Letters Work
To get preapproved for a mortgage, you'll go through most of the steps to officially apply for a mortgage loan. The lender will conduct a hard credit inquiry to check your credit report and scores, and evaluate other aspects of your finances, including your income, outstanding debt and expenses.
At the end of this process, the lender will confirm whether you're likely to qualify for a mortgage. They'll provide you a letter with the following information:
- Mortgage type
- Loan amount
- Loan-to-value ratio of the home
- Expected loan interest rate and fees
You'll include this letter with your purchase offer to show you'll likely get financing from that lender. This can signal to sellers that you're a committed, trustworthy buyer.
Learn more: How Long Does a Mortgage Preapproval Last?
Can You Make an Offer on a Home Without a Preapproval Letter?
Yes, you can make an offer without preapproval, but it's not recommended if you're planning to finance the home. That's especially true when there are multiple potential buyers.
Sellers want to know there's little chance your mortgage application will be denied, drawing out the process and forcing them to find a new buyer. Additionally, in a tight market, if you don't provide a preapproval letter and another buyer does, you could lose out on the home.
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When Preapproval Letters May Not Be Necessary
It's less risky to submit an offer without preapproval if the local housing market isn't very competitive or if you know the seller well. You'll need to confirm you have financing before closing on the home, but preapproval isn't as crucial as it would be if you were competing with multiple bidders.
Tip: You don't need a preapproval letter if you're paying cash and not pursuing a mortgage. Paying all cash for a home is difficult because it requires a large amount of liquid cash. From a seller's perspective, however, an all-cash offer is attractive because it avoids the risk of financing falling through.
Preapproval vs. Prequalification
Unlike the more comprehensive preapproval process, mortgage prequalification is quick and easy, and you can complete it by answering basic questions from a mortgage lender. You'll self-report information about your income, borrowing amount and down payment amount, and the lender will perform a soft credit inquiry, which doesn't affect your credit scores. The lender will then let you know whether it considers you eligible to submit a full mortgage application and, if so, roughly how much you can borrow.
Prequalifying can help you narrow down your choice of potential lenders. The loan amount figures generated in the prequalification process are only estimates, however—helpful for comparison purposes, but nothing you or a home seller can count on. Lenders will need to take a closer look at your finances before preapproving you, and then, later, extending a firm offer for a loan.
| Preapproval | Prequalification | |
|---|---|---|
| What it is | Official step in the mortgage application process—and strongly recommended in a competitive market—that leads to a preapproval letter, which shows sellers you're a serious buyer with financing in order | Optional step before mortgage preapproval that gives you an estimate for how much you may be able to borrow from a mortgage lender |
| Verification level | High: Requires proof of income, expenses, debts and assets | Low: Requires only self-reported information |
| Credit check | Hard credit inquiry | Soft credit inquiry |
| Accuracy | High: Upon preapproval, there's a good likelihood you'll be approved for a mortgage | Low: You may still be denied a mortgage even after you prequalified |
How Do I Get a Preapproval Letter?
When you apply for mortgage preapproval, you go through many of the steps required in the full mortgage application process. If you've prequalified with a few lenders, you can start the preapproval process with them, or you can seek out new lenders and complete their online or in-person application.
You'll need to submit documents confirming your:
- Identity: A copy of a government-issued photo ID, such as a driver's license or passport
- Social Security number: Needed to confirm your identity and run a credit check
- Income: Recent pay stubs or tax returns
- Monthly expenses: Current housing payments, credit card minimum payments, payments on any other loans (student loans or car loans, for example)
- Cash savings and investments: Bank account statements and account statements showing other assets such as investments
If you meet their qualifications, lenders will issue you a preapproval letter indicating the amount they're willing to lend you for a home purchase. This amount isn't guaranteed, since mortgage approval always applies to a specific property and your financial situation the moment you formally apply for the loan. But it's the strongest sign of favorable financing any prospective buyer can give to a seller. (Only cash in hand would be better assurance.)
Learn more: Should You Apply for a Mortgage Online?
Does Getting Preapproved for a Mortgage Hurt Credit Scores?
Lenders' preapproval processes include credit checks that generate a hard inquiry entry on your credit report. These inquiries typically cause reductions in your credit scores of up to five points and generally have an effect on your FICO® ScoreΘ for 12 months. If you submit multiple applications for mortgage preapproval within 14 to 45 days, the credit scoring algorithms will treat them as one inquiry, further protecting your score.
It's always best to have the highest credit scores you can get before you apply for a mortgage, but the strategic advantage of preapproval, especially in highly competitive real estate markets, can make the small potential drop in your scores worth it. And if you follow up on a loan application with the lender that preapproved you, they may take any small change in score into account when issuing a final loan offer.
How to Get Your Credit Ready for a Mortgage
Since your credit score has such a significant effect on your mortgage eligibility and eventual interest rate, focus on strengthening your credit at least six months to a year before you apply for mortgage preapproval. That could qualify you for lower interest rates and save you tens of thousands of dollars over the life of a mortgage.
1. Check Your Credit Reports and Credit Scores
Learn where your credit stands by checking your scores and getting your credit reports from all three credit bureaus (Experian, TransUnion and Equifax). Review each credit report carefully to make sure it accurately reflects your credit history. If you see any inaccuracies, you have the right to dispute them.
When you get your FICO® Score for free from Experian, you'll also get some explanatory notes on what's affecting it (called risk factors) and how you can make improvements. Those suggestions can help you identify actions to take to improve your scores in the months ahead.
Learn more: How to Build Credit to Buy a House
2. Pay Every Bill on Time
A major influence on your credit scores is your debt payment history. Late payments—especially recent ones—can significantly drag down your credit scores. In the months leading up to a mortgage application, make sure to pay every bill on time.
If you have any past-due payments, be sure to get them caught up as soon as possible.
3. Avoid New Credit
Applying for loans and credit cards causes hard inquiries, which can temporarily ding your credit scores. Taking on new debt can also alter your monthly expenses and make lenders question your ability to afford a mortgage payment.
4. Reduce Credit Card Debt
Lowering existing debt can also help your credit standing. A major factor that determines credit scores is credit utilization ratio, or the percentage of your credit card borrowing limits compared to your outstanding balances. Damage to your credit scores can worsen when utilization ratios near or exceed 30%, so getting your credit usage below that level is a good goal—and keeping it below 10% is even better.
Frequently Asked Questions
The Bottom Line
Securing a mortgage preapproval letter from one or more lenders can give you—and, more importantly, home sellers—a much more accurate idea of how much money you have to spend. When you've finally found the house that meets your needs and budget, it's not necessary to submit a preapproval letter with your offer. But getting preapproved can allow you to shop with greater confidence, and give sellers greater confidence in you as a buyer too.
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About the author
Brianna McGurran
Brianna McGurran is a freelance journalist and writing teacher based in Brooklyn, New York. Most recently, she was a staff writer and spokesperson at the personal finance website NerdWallet, where she wrote "Ask Brianna," a financial advice column syndicated by the Associated Press.
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