In today’s highly competitive real estate market, where bidding wars are becoming a rite of passage in many cities, it’s easy for buyers to get pushed way over their homebuying budget.
That’s not only stressful — it can create real problems down the line when you try to secure a home loan. Thankfully, there’s one step you can take to keep your budget in line: Get a mortgage preapproval letter early in your home search.
A mortgage preapproval letter may not sound glamorous, but it’s a document that can essentially serve as your rulebook: It will tell you how big of a loan you can get, and therefore give you a ceiling on how much you can spend on your new home.
So before you go falling in love with high-priced real estate, take the steps to realistically understand your budget, and stick to it. Mortgage preapproval letters are usually valid for one to three months, which should give you enough time to look within your price range.
What Is a Mortgage Preapproval Letter?
A mortgage preapproval letter is a document from a bank or lender that says what type of loan and how much debt you’re approved to take on. In other words, it’s a way of proving that you are eligible for the mortgage you’ll need to buy a home.
“It’s a letter giving indication whether a borrower is a valid borrower for home financing,” says Kevin Parker, vice president of field mortgage originations at Navy Federal Credit Union.
A mortgage preapproval is important for a few different reasons, Parker says. Maybe most crucial in today’s competitive market is that a preapproval letter tells the seller of a home that you’re a serious buyer who can afford to pay what you’re offering.
Mortgage preapproval letters are more than just a piece of paper: They can also be your roadmap for how much you can spend, and what types of homes you should focus on.
Plus, these days, having a preapproval letter is more-or-less a requirement if you want to pursue a home with a realtor.
“This is just a way for everyone to use their time wisely,” says Katie Bossler, a quality assurance specialist at GreenPath Financial Wellness. Real estate agents don’t want to waste their time showing you homes you can’t get approved for.
The preapproval letter can also help guide you as a buyer: “It really gives the lender an opportunity to let the borrower know what their potential [loan] options might be,” Parker says. “That typically dictates the types of homes they should be looking for.”
That may mean focusing on single-family homes versus condos, which have different loan requirements; the preapproval letter acts almost like a map to your home options.
How Long Does It Take to Get Preapproved for a Mortgage?
The timeline for securing your preapproval letter depends on the lender and on how you apply for one. Bossler says it takes one or two weeks in most scenarios.
Almost all lenders, big and small, now offer online preapproval applications, which speed up the process and allow you to submit documents (like proof of income) online. For more complicated applications — if you’re self-employed, for example — added documentation might slow down even the online process.
If you prefer to meet with a lender and apply in person, that’s always an option, too. “It’s really all personal preference,” Parker says.
Bossler says you should also make sure you know the difference between a preapproval and a “prequalification.” Some lenders offer “instant approval” for a prequalification letter, which is generated by your self-reported income data and doesn’t carry the full weight of a proper preapproval letter, which requires more documentation.
How Long Is a Preapproval Good For?
In most situations, a preapproval letter will be valid for 30 to 90 days.
The reason that preapprovals expire is because your financial situation may change significantly over time, which then impacts what type of loan you’ll qualify for. Lenders want to make sure they’re giving you an accurate loan estimate that reflects your most current financial standing.
“We can always go back and refresh them,” Parker says. Often this needs to be done for new construction homes, when the houses are completed months after the initial preapproval was granted.
This system also benefits you as the buyer — you don’t want to be presenting an inaccurate offer on a home and find out later you no longer qualify for that mortgage.
Preapproval letters can also be “refreshed” depending on the house you’re trying to purchase. For example, if you qualify for a maximum $400,000 mortgage, but the home you want to buy is listed for $300,000, you may not want to “show all your cards” by submitting a $400,000 mortgage preapproval, Parker says. In those situations, letters can be customized, to an extent, to suit the specific offer you’re making.
Should I Get More Than One Preapproval Letter?
Much like anything else, it’s never a bad idea to shop around.
Each lender will have a different approach, and different interest rates. Plus, you want to make sure you feel comfortable with that specific loan officer.
“The only way to really know for yourself is if you’re shopping around for different lenders,” Bossler says.
But that doesn’t mean you necessarily have to seek a preapproval letter for each lender you speak to. Each mortgage inquiry you submit does negatively impact your credit score, usually by a few points. If you submit multiple inquiries within a 45-day window, however, you might be able to avoid multiple hits to your credit, as credit bureaus will see obviously you are mortgage shopping.
Feel free to explore your options and get more than one tailored loan estimate for your specific situation. But remember that there’s a pile of documentation required for each preapproval, and you want to be conscious of impacting your credit score.
When Is a Good Time to Start the Mortgage Preapproval Process?
It’s almost never too early to start the preapproval process.
Parker says there’s a common refrain among realtors he works with: “Make sure you have a preapproval letter before you put a client in your car.” That’s because realtors want to make sure you’re serious and qualified for a loan before you see any homes — and potentially fall in love with them.
The preapproval is also important to secure early as a way of determining your homebuying budget. If you know how much of a loan you’ll qualify for at the beginning of your home search, you can focus on properties that fall within that budget.
The only drawback of starting the process too early would be if your financial situation changes significantly during your home search — if you take out a new car loan, for example — and it impacts the type of loan you qualify for, Parker says.
But starting too late can also cause problems. If you wait until you’re ready to make an offer, you’ll find yourself scrambling to contact a lender, and might miss your opportunity to put a bid on the home.
So as soon as you have your “ducks in a row” — meaning you know your credit score is solid, you have enough income and a cushion of savings — go ahead and find out how much home you can really shop for by getting a formal preapproval.