Before you start looking at houses, you should get preapproved for a mortgage. That will allow you to begin the homebuying process knowing the maximum amount you can borrow. A mortgage preapproval letter can give a seller confidence that your finances are in good shape and that you will likely be able to get final approval for a home purchase.
What Does the Preapproval Process Entail?
To get preapproved for a mortgage, you will have to provide a lender with information on your employment, income, assets and debts. The lender will review that data, along with your credit score, to decide whether it’s willing to give you a mortgage to buy a house, and if so, how much you may borrow.
To assess your creditworthiness, the lender will request your credit report from one or more credit bureaus. When a company requests a credit report to decide whether to grant an individual a loan, it performs a “hard inquiry.” That causes the potential borrower’s credit score to drop temporarily. If you seek preapproval for a mortgage, the exact amount your credit score will go down and how long it will take for it to recover will depend on whether you regularly make payments on time and whether you have applied for other loans or credit cards recently.
What Can You Do to Qualify for a Mortgage With Attractive Terms?
Well before you plan to apply for mortgage preapproval, request copies of your credit reports and check them for errors. If you find any issues, dispute them so that the credit scores lenders see will be based only on accurate information.
If your credit score is lower than where it needs to be, use the next several months to a year to work on improving it. Focus on paying all your bills on time and reducing debt. If possible, hold off on taking out an auto or personal loan until after you buy a house and avoid making any major purchases with credit cards. Doing so would increase your debt-to-income ratio and may make it harder to qualify for a mortgage.
Each lending institution sets its own guidelines when it comes to minimum credit scores and interest rates. If you submit the exact same information to several lenders, you may get back mortgage offers with very different terms. Seeking preapproval from multiple lenders can help you understand your options and find the best loan available.
If you apply for preapproval from multiple lenders in a short period of time, all those hard inquiries will be treated as one. Lenders can use a variety of credit scoring models. Some models count all hard inquiries related to mortgage preapproval that occur within 14 days as a single inquiry. In other cases, all hard inquiries within 45 days are counted as one. If you submit several applications around the same time and all those hard inquiries are lumped together, they will only cause your credit score to go down once.
