What is mortgage preapproval?

Mortgage preapproval requires official documentation and a hard credit inquiry, which affects your score. Maskot/Getty Images

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• When a lender preapproves you for a mortgage, it tells you what loans you may qualify for and more.
• A mortgage preapproval letter is usually valid for 60 or 90 days.
• Having a mortgage preapproval letter shows sellers that you're serious about buying a home.

Mortgage preapproval is an early step in the homebuying process. When a lender preapproves you for a mortgage, it's saying it would like to work with you.

In a preapproval, the lender tells you which types of loans you may be eligible to take out, how much you may be approved to borrow, and what your rate could be.

When you apply for preapproval, you'll need to provide financial documents such as bank statements and tax forms. Lenders will also do a hard credit inquiry to find out your credit score; the inquiry will show up on your credit report and could temporarily affect your credit score.

You can apply for mortgage preapproval with multiple lenders. In fact, it's usually a good idea to get preapproval letters from several companies so you can find the best fit.

Preapproval vs. prequalification

Mortgage preapproval and prequalification are similar steps in the homebuying process. They're both ways for lenders to tell you what the terms of your mortgage could be, but they have some key differences.

When you apply for prequalification, you'll tell a lender information such as your income and credit score. But you don't have to provide any official documents, and the lender won't perform a hard credit inquiry (so your credit score won't be affected).

Mortgage prequalification isn't as thorough of a process as preapproval, so your results won't be as precise. Once a lender gets hold of your financial records and credit score through a preapproval, they can give you more accurate numbers.

Prequalification takes place before preapproval in the homebuying process. You'll probably apply for prequalification if you're just starting to consider buying a home, and you'll apply for preapproval once you're ready to shop for homes.

That preapproval requires official documentation and a hard credit inquiry, which affects your score. Preapproval letters are only valid for two or three months, so if you're still a ways out from buying, start with prequalification to get a general idea of what buying a home could mean for your finances.

Many homebuyers apply for prequalification, then preapproval, then approval.

Preapproval vs. approval

You'll apply for preapproval when you're shopping for homes; you'll apply for approval once you've actually chosen the home you want to buy.

Getting preapproved for a mortgage doesn't guarantee you'll be officially approved, because a) your financial situation may have changed in the two or three months you've been shopping for homes, and b) approval partly depends on the state of the home you want to buy.

For example, if you lose your job or your credit score plummets, a lender may decide not to approve you even if they already preapproved you for a loan.

A lender also might decide not to approve you if something goes wrong with the inspection or appraisal. For instance, if your appraisal shows the home value is significantly lower than the listing price, then you may not be approved.

Do I have to be preapproved to get a mortgage?

A mortgage preapproval may sound like a superfluous step in the homebuying process, shoved between prequalification and approval. Do you really need to apply for preapproval?

No, you don't have to apply. But it's probably a good idea.

First of all, applying with multiple lenders helps you compare and contrast what each offers. Comparing prequalification terms isn't quite as accurate.

Second, having a preapproval letter in hand shows real estate agents and sellers that you're serious about buying a home and can give you more clout.

When should I apply for mortgage preapproval?

Apply for preapproval once you're ready to shop for homes and plan to find your dream home in the next two or three months. Preapproval letters are usually only valid for 60 or 90 days, so you don't want to get your letter too early.

If you're going to apply for preapproval with multiple lenders, then try to hit all of them within a month or so.

Why? Hard credit inquiries.

When you apply for preapproval, a lender does a hard credit inquiry. A bunch of hard inquiries on your report can hurt your credit score — unless it's for the sake of shopping for the best rate.

If you limit your rate shopping to a month or so, credit bureaus will understand that you're looking for a home and shouldn't hold each individual inquiry against you.