You should get preapproved for a mortgage loan from your lender before you begin shopping for a home. Most sellers today will not take you seriously as a potential buyer unless you are pre-approved.
Preapproval lets sellers know that the bank has agreed, in principle, to approving your mortgage loan for homes within a certain price range. While not a guarantee, preapproval tells the seller that a bank or lending institution has looked at your credit report and income and considers you to be someone who is likely to qualify for a loan.
When a lender is deciding whether or not to preapprove your application, they will look closely at your credit report, consider your credit score and other pertinent information, and factor in your income-to-expense ratio. Then they make their determination. Lenders don’t generally charge a fee for preapproval applications.
If your application is accepted, your preapproval will be valid for two to four months. This gives you a window of time to go house shopping. If the preapproval period runs out before you find a home, you can apply again. Unless your credit rating has dropped, you will likely be preapproved again. Obviously, you will need to do everything within your power to maintain your good credit rating while shopping for a home.
Once you receive your preapproval letter, you are ready to begin your house shopping in earnest. But your preapproval still isn’t a loan commitment.
For example, once you find a house you want to buy, it will need an inspection and an appraisal before the lender will commit to granting a loan. This is as much a benefit to the borrower as it is to the lender. After all, if the inspector finds leaks in the ceiling, not only is the lender less inclined to give you a loan, but you are also less inclined to take one for that property. The same holds true if the appraisal finds the house is worth considerably less than the seller is asking. None of these factors affect your preapproval, however. It means only that the lender may not be willing to grant you a loan for that particular property — which may be just fine with you.
It is important not to confuse preapproval with prequalification. When you prequalify for a loan, you are essentially having a lender look over your income and expenses to determine how much you can afford. This is a preliminary step that may be taken prior to preapproval if you want a better estimate of your home purchasing spending limits. While prequalification can help you understand how much you can afford to pay for a home, it is not essential.