What to know about mortgage preapproval

Though the real estate market has changed significantly in recent years, some conventional home buying wisdom still holds true. The importance of mortgage preapproval is one such notion, and it's even likely that being preapproved for a mortgage before making an offer on a home is more significant now than it was as recently as half a decade ago.

What is mortgage preapproval?

Mortgage preapproval essentially confirms to sellers and sellers' agents that a given buyer has qualified for a mortgage they can use to purchase a property. In a competitive real estate market like the current one, mortgage preapproval can set buyers apart from the competition, increasing the likelihood that their offers will be accepted over ones submitted by buyers who have not been preapproved.

What is prequalification?

Some buyers may hear the term "prequalification" and assume it's the same thing as preapproval. There is a notable distinction between the two terms. Prequalification is less formal and based on a casual conversation with a lender that may or may not involve details about a buyer's credit history, income, monthly expenditures, and other pertinent financial information. Preapproval is a formal examination of a buyer's finances and financial history that is conducted after documentation such as W-2s and bank statements are provided. A lender also will conduct a credit inquiry through three major credit bureaus during the preapproval process.

How do I get mortgage preapproval?

Mortgage preapproval is a simple process and it's a service offered by most mortgage lenders. A simple phone call or email to a lender can get the process started, and it does not take long for a lender to decide if an applicant qualifies for preapproval. However, insufficient documentation or misleading information can slow down the preapproval process (and potentially cause a lender to deny an application), so prospective home buyers are encouraged to provide ample and honest documentation of their finances.

Does mortgage preapproval expire?

It can take buyers a long time to buy a home in a competitive market with low inventory. So it's important that prospective buyers recognize mortgage preapproval has a shelf life of around 60 to 90 days. The preapproval letter a lender provides will indicate an expiration date for the preapproval. If that date comes and goes without buyers purchasing a home, they will have to reapply for preapproval.

Must I borrow from the lender who preapproved me?

Buyers also should know that a mortgage preapproval does not bind them to the lender who preapproved them. Buyers can still shop around for a mortage once they make an offer on a home.

Mortgage preapproval is a vital part of the home buying process and can be especially useful in a competitive real estate market.