Mortgage preapprovals more than 3 months old are generally considered out of date, but letters can last as long as 180 days. Depending on how long your search is, you may need to renew it more than once before closing on a home.
Having a letter of preapproval from a financial institution can help ensure that you’re ready to snap up a home you love.
What Is a Mortgage Preapproval Letter?
A letter of preapproval can be an essential part of the home-buying process. It shows sellers that you are serious about buying a home and that a lender is likely to give you a mortgage quickly.
A preapproval letter is a lender’s written statement that it is willing to lend you a specified amount of money for a mortgage, although it’s not quite a commitment.
The lender will review your credit history, income, and assets to determine the amount you qualify for. The letter will then state that number and may outline stipulations to gain the loan, such as maintaining your employment or not taking on any additional debt.
A preapproval letter can help you focus on homes that are in your price range. This is important in competitive markets, when you won’t want to waste time reviewing homes that are out of your budget. A preapproval letter can also signal to sellers that you are a serious buyer, and many sellers require one before accepting an offer.
Letters of preapproval may last anywhere from 90 to 180 days, though many view anything older than 3 months as out of date. That time frame tends to work, since homebuyers, on average, shop for a home for three to six weeks, according to the Home Buying Institute.
Mortgage Prequalification vs. Mortgage Preapproval
Since they sound similar, it’s worth mapping out the difference between prequalification and preapproval.
Prequalification is a key first step in the mortgage process.
You will tell lenders about your income, assets, and debts to get a sense of the loan programs and rates you might receive.
Lenders use that unverified information, and usually a soft credit inquiry, to give a ballpark estimate of how much you may be able to borrow and at what terms.
This estimate is useful because it can give you an idea of how much house you may be able to afford. Prequalification can also give you an idea of what your monthly mortgage payment would look like.
However, prequalification does not mean that a lender is guaranteeing a loan. At this stage, your loan qualifying information is typically not verified.
The mortgage preapproval process is an examination of your income, employment, assets, debt, and creditworthiness, and it represents the next step in buying a home.
When considering you for preapproval, lenders will scrutinize:
• Income: Employees will need to provide pay stubs, W-2s, and tax returns from the past two years, as well as documentation of any additional income, such as work bonuses. Self-employed workers often need two years’ worth of records and a year-to-date profit and loss statement, although many lenders and loan programs are flexible.
• Assets and liabilities: You’ll need to provide proof of savings, investment accounts, and any properties. Lenders view assets as proof that you can afford your down payment and closing costs and still have cash reserves. The lender will also look at monthly debt obligations to calculate your debt-to-income ratio.
• Credit score: Your credit score is a numerical representation of your credit history. It reflects debt you’ve taken on and whether you’ve made payments on time.
Once your lender has reviewed the information, it may offer a letter of preapproval stating the maximum mortgage amount that you have been preapproved for, how long the letter is good for, and any conditions that need to be met for final loan approval.
A preapproval may help you compete with homebuyers who are purchasing in cash. Some sellers won’t even consider offers that don’t have at least a preapproval, so this letter makes it more likely they will select your offer on a property.
It’s possible that even after preapproval, the lender may choose not to issue a mortgage. A lender, for example, might withhold final approval if it discovers previously undisclosed financial information that changes qualifying eligibility, or if the property you want to purchase is not eligible for lending because of its condition.
To sum it all up:
• Doesn’t require a credit check
• Checks credit history
• Is based on financial assumptions
• Is based on verified facts
• Provides an estimated mortgage amount
• Provides an offer to lend a specific amount
• Is less reliable than preapproval
• Is much more reliable than prequalification
How quickly a mortgage preapproval can be completed can vary by lender and how quickly documentation has been supplied, but it could range from 24 hours to 10 days.
Importantly, receiving preapproval from a lender does not obligate you to use them. If home loans with more desirable terms are available, it would be smart to look into them.
What to Do When Your Preapproval Expires
Lenders put an expiration date on preapproval letters because they need to have your most up-to-date financial information on hand. The credit, income, debt, and asset items they reviewed for your preapproval typically need to be updated after 90 days.
You might leave your job and no longer have a steady income, or a financial emergency may have taken a big bite out of your savings. As a result, the lender will want to reassess your finances.
If you’re using the same lender you will need to provide updated pay stubs and bank statements, and your credit may be checked again.
You can minimize the effect of “hard pulls” on your credit score by avoiding seeking a renewal when you’re not actively shopping for a home, and by working with only one lender during the preapproval stage.
If your finances have mostly stayed the same, your lender is likely to renew your preapproval.
Finalizing Your Mortgage
If you find a house while your mortgage preapproval is still valid, you can move on to finalizing your mortgage application. At this point, in many cases, lenders will check again to see if there have been any changes to your financial situation.
The mortgage underwriter will review all the information, order an appraisal of the chosen property, get a copy of the title insurance, and consider your down payment. Then comes the verdict: approved, suspended (more documentation is needed), or denied.
Your mortgage is not officially approved until you receive a final commitment letter. After you have the letter, a closing date can be scheduled.
Buyers may want to minimize changes, like applying for other loans or credit, when a home loan is in underwriting.
How long is a mortgage preapproval good for? Ninety to 180 days, though a letter older than 3 months is generally considered out of date. Getting prequalified is a good precursor to getting preapproved.
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