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Prospective homebuyers know the importance of "location, location, location," but timing can be critical too. Securing mortgage preapproval at the right moment in your house-hunting journey can help seal the deal, preserve your credit and spare you unnecessary expenses. Here's the lowdown on when to seek preapproval.
The Best Time to Get Preapproved for a Mortgage
Providing a copy of a mortgage preapproval letter with a purchase offer can indicate to a prospective seller that you have the financial means to follow through on your bid. While preapproval is an optional step in the home financing process, it can be a practical necessity in highly competitive housing markets, especially if rival buyers are able to pay in cash.
It's important to arrange mortgage preapproval only when you're serious about making an offer on a home. Getting preapproval too early in the house-hunting process can be wasteful for the following reasons:
- Mortgage preapproval letters are only valid for a limited time—typically 90 days, but possibly as little as 30 days. If you secure preapproval before you're ready to bid, your preapproval letter could expire before you can use it to secure your dream home.
- Mortgage preapproval applications can require fees of several hundred dollars. If a letter expires and you have to reapply for another, it'll cost you another fee.
- The credit check required for mortgage preapproval generates a hard inquiry on your credit report, which typically causes a small drop in your credit scores. Most scores recover quickly as long as you keep up with your bills. But if your preapproval letter expires and you need to reapply, the second credit check could ding your scores before they have time to bounce back. Since you'll want your credit profile to be as favorable as possible when you submit a final mortgage application, repeat preapproval applications can work against you.
It's also possible to apply too late for a mortgage preapproval. It typically takes only a few days to generate a preapproval letter, once you've submitted all necessary documentation (more on that below). If you're self-employed, have a very limited credit history, or if the lender has questions about any of your back-up documentation, however, the process could take as long as two weeks. Gauge your circumstances accordingly, and don't wait to apply for preapproval when you're already rushed to bid on the ideal property.
If you're still in the early stages of house hunting and are curious about how much you may be able to borrow, consider seeking mortgage prequalification. Prequalification is a less rigorous process than preapproval during which a lender estimates the size of mortgage you might be able to get based on your credit and your responses to a few questions about your income, available down payment and debts.
How to Get a Mortgage Preapproval
Seeking mortgage preapproval from a lender is very similar to submitting a mortgage application. The big difference is that, unlike a mortgage application, preapproval doesn't apply to a specific property. Based on a review of your credit and finances, including your credit and income history, debts and, possibly, other assets or sources of cash, the lender issues a letter indicating how much it is willing to lend you to buy a house, and at what interest rate.
When you apply for mortgage preapproval, you'll need to furnish the lender the following items:
- Proof of identity: The lender will need a copy of a passport or driver's license and a Social Security number for each applicant.
- Credit approval: You and any co-applicants must authorize the lender to access your credit reports and credit scores.
- Income verification: Applicants typically will need to supply pay stubs, bank statements and tax returns for the past two years. If you are self-employed, the lender will average the annual incomes reported on your two most recent federal income tax returns.
- Down payment: Depending on the type of loan you seek, you'll typically need to prove you have access to cash in an amount of 5% to 20% of a potential home purchase price. (Certain government-backed loans allow lower down payment amounts.)
- Records of debts and assets: Mortgage lenders typically measure borrowers' monthly debt obligations relative to their incomes by calculating debt-to-income (DTI) ratio, and may limit the size of a loan based on the borrower's ability to afford the monthly payments. Lenders often favor borrowers with sufficient resources to cover loan payments for several months in case of temporary income loss, as evidenced by assets such as savings, investments and real estate.
Check Your Credit Before Getting Preapproved
Well before you begin the homebuying process—ideally six months to a year before you seek mortgage preapproval or apply for a mortgage—it's wise to check your credit report and credit scores to know where you stand, and to give you time to clear up any credit issues that might prevent your credit scores from being the best they can be when you're ready to buy your new home.
Mortgage preapproval can give you an important strategic advantage when you're buying a home in today's red-hot real estate markets. Correct timing of your preapproval application is an important tactic in your homebuying game plan.