What is “preapproval” and why do I need it?

Not many people have the cash to buy a home. If you do, you already know you don’t need a mortgage preapproval. But for the rest of us cash-poor mortals, mortgage preapproval (before you begin your house hunting) lets you know exactly how much you are qualified to borrow, and thus what you can spend on a home. What is the point of looking for a home until you know how much home you can afford?

Furthermore, when you decide on a home, the seller will want to know that you are able to pay what you are offering before he will consider your offer. Thus when you make an offer, you are expected to provide a letter from a reputable lender saying exactly that.



The lender wants to understand your personal financial picture, including savings, credit history and income. To help you get a quick idea of what you can afford – which they generally call a prequalification – they will usually run a credit check, and accept your word on your income and assets.

The next step involves having you provide bank statements and such to verify assets, and paystubs or other income verification documents. When they have seen these, they can provide you with a preapproval letter referencing your ability to borrow a specific amount. What is nice about all of this is that most good lenders don’t charge you anything for these services, nor do they require that you use them for your mortgage.

The keys to getting a solid preapproval are:

  • establish a consistent record of paying your bills on time, to keep your credit rating up;
  • aim for having enough savings to cover your down payment, closing costs if necessary (figure 2-3% of the sales price but often the seller will contribute this), and two month’s expenses in case of emergency. While you wouldn’t want to tap retirement savings for your down payment or other house purchase costs, they do represent reserves that help reassure the lender about your financial stability, so be sure to include these in your assets;

  • a stable employment history is important, but if you’ve recently completed college, or were in the military, you have good reason to have less work history. If you are a freelancer or do contract work, the lender will look for consistency in income over the last two years, so hang on to those tax returns.

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2 Responses to What is “preapproval” and why do I need it?

  1. I finally decided to write a comment on your blog. I just wanted to say good job. I really enjoy reading your posts.

  2. […] outside your price range. Before beginning your home search, get pre-approved by a mortgage professional – preferably one you know or one recommended by your agent […]

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