Why a Mortgage Preapproval
Why Should I Get a Mortgage Preapproval Letter?
What is a mortgage preapproval and why would I want to get one? Short of a formal loan commitment, there are two types of letters that a lender will issue to help a house hunter in the purchase of a home.
A prequalification letter is one that is issued by a lender after reviewing certain financial information submitted by the buyer. This letter is rather broad and gives an estimate of the amount of a mortgage that the buyer may qualify for.
A preapproval letter is one that is issued by a lender after reviewing and verifying all of the financial documents that are required for a mortgage application. The lender then issues a letter stating exactly the amount of a mortgage they would be willing to extend to the borrower.
Many realtors agree that going house hunting without a mortgage preapproval letter is like shopping in a grocery store without any money. And yet, many home buyers don’t bother to get it.
Mortgage underwriters say that the documents needed for the preapproval letter are the same as those that you are required to submit with any mortgage application. These documents are the following and are not all-inclusive:
- Several months of pay stubs
- W-2 forms for the past two years
- Federal income tax returns for past two years
- Two months or more of current bank statements
- A current credit report
Even though the mortgage preapproval letter is not a letter of commitment, it does help to speed up the loan approval and underwriting process.
Before you go house hunting, consider the following four reasons why it will benefit you to get a preapproval letter.
- The real estate market is very competitive.
Quite often, home buyers are more interested in looking at homes and don’t want to get involved with the tedious and sometimes mundane end of the home buying process. However, because the market is competitive, every serious home buyer really needs to get this letter before looking for a home. - Your offer may not be accepted without the mortgage preapproval letter.
Many realtors and lenders alike, say that it’s not at all unusual to find home buyers who don’t bother to get the preapproval letter in advance. It still happens too frequently, and some realtors will refuse an offer without one. - Many realtors verify the information in the letter.
They will make sure that it’s a bona fide preapproval. They call the lender to verify that not just the credit was considered, but also the buyer’s tax returns and bank statements. - It’s important that you and the seller know if you will be approved.
There are some homebuyers that procrastinate because they have some concern that they may not be approved for an amount they are planning to spend. It’s better to know up front if you will be approved for a certain amount rather than wait until you have found your dream house, and then get declined.
Then there are some other home buyers that don’t want to share their personal financial information with a lender until they have found the home they are looking for.
There are so many factors that are considered by lenders that will qualify you for a home mortgage, that no two situations are the same. Even if a friend and yourself earn the same, and you both have good credit, one may qualify for a higher loan than the other.
A slight difference in your credit score can mean a higher rate of interest, a higher down payment, and even the loan term and points.
Another good reason for getting a preapproval letter is that if there is an error on your credit report, you’ll have more time to get it corrected.
We recommend that you get a mortgage preapproval letter to maybe avoid having an offer being refused and to correct any other errors if any in your credit and financial information.
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18 responses to “Why a Mortgage Preapproval”
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Gust Lenglet – Platinum Author
I for one can say that having a pre-approval letter got us the house that we really wanted. There were two other buyers bidding and neither one had the letter. The seller needed to settle quick because of a job move, so he accepted ours.
Hi Rebecca. Glad to hear that you got your home. It’s almost unheard of today where a broker wouldn’t tell the buyers what they needed.
My wife and I had problems for not having a pre-approval letter. We were moving to a very small town and the realtor said they didn’t bother with those things around there. As it happened, there was another bidder on the property and he had one, and the seller accepted him over ours.
Hi Jerry. Sorry to hear about your mis-fortune. Sometimes in very small towns they have different ideas, but it’s best to be prepared.
I just wanted to advise everyone about pre-approval letters from a lender. All of them are not what they seem. There are predatory lenders out there that will carefully word a letter of pre-approval without seeing one proof of income or even a credit report. A realtor and any seller needs to be very careful.
Hi Edith. You’re so right, there are still some shady people out there and everyone needs to be super careful. A good realtor should be able to steer you clear of most though.
Many people don’t know what a mortgage pre-approval is or how to find a lender to get pre-approved, or why should we get pre-approved. These details are very important to know. Your information is very helpful for readers. Thanks for your effort.
Thanks for your comment Bill, we really appreciate it, and try to keep as many informed as possible.
I’m having some problems getting pre-approved! I earn a mere 47k/yr. I have 5 college degrees; I’m an honorably-discharged U.S. Army Lt. It all boils down to MONEY!
Thanks for stopping by Eddie. Unfortunately, lenders only look at income and credit score. Have you gone through the VA for help?
Here’s a good one that happened to my wife and I. We went in to get a pre-qualified letter which was all the broker requested. Our total gross income was $140,000 and we assumed that we would make a 5% down payment. The broker ran the numbers through his program and it came out with a number of $840,000. He said the program must have really loved our credit score. Needless to say, the home we bought was far below that number.
Hi Gino. That broker must have been using a strange program or else he/she added an extra zero to your income number.
A couple of years ago I was selling my home and there was a problem with certain pre-approved buyers who contacted some shady lenders. Apparently they called these lenders on the phone and after about a fifteen minute conversation, their pre-approval letter was being faxed to them. My real estate broker screened every offer and verified they were indeed pre-approved and made sure the terms matched the offer. She said that there were still some predatory lenders out there who were creating problems for buyers.
Hi Peter. Unfortunately, there are still some shady operators doing business. What some of them do at the last minute after they finally get a buyer’s info, is to change everything, especially the interest rate. Your realtor was on the ball and knew exactly what to do.
I’m a licensed real estate agent in CA and back when I used to handle residential property, there was a mortgage broker who would send you a pre-qualified letter for a buyer with just a phone call. Savvy agents and sellers know that a pre-qualified letter isn’t worth the paper its written on.
Thanks for your comment Fran. Yes, an experienced agent knows a pre-qualified letter is worthless. Many sellers, however, don’t.
I too was amazed last year when I was looking for a pre-approval letter from a broker. The figure that they gave me was much higher than I felt comfortable in doing.
The bank where I work will not exceed a 40% DTI, and that figure I was approved for would have gone way over that.
Hi Ashley. Some lenders, when they need to book loans, will often times exceed the DTI ratio hoping the borrower will be able to pay, or maybe sell the home in a few years.