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What is mortgage preapproval?

Before you start shopping for a home, the number one piece of advice for homebuyers in today's market is to get a mortgage preapproval. While a mortgage preapproval doesn't guarantee a loan, or that you’ll find a home you want to buy, it does provide you with:

  1. How much mortgage you can borrow
  2. Your estimated monthly payment
  3. Documented proof to a seller that you can qualify for financing

"You wouldn't go to the grocery store without your wallet and you shouldn't shop for a home without a preapproval for a mortgage," says Dominic Turano, branch manager for First Home Mortgage in Washington, D.C.

Turano says most Realtors won't discuss properties with you until you have a mortgage preapproval.

What's the difference between preapproval and prequalification?

Getting prequalified is the first step toward a preapproval. A prequalification can be done by anyone – your Realtor or mortgage associate can run one on you, or you can even run one yourself. This is done in order to produce a working price range for homes you can likely afford. A prequalification will produce a “ballpark” estimate of how much mortgage your income will support.

"When you prequalify someone for a loan,” says Aiman Abozeid, branch manager for Inlanta Mortgage in Madison, Wisconsin, your loan originator will check three things:

  1. Your credit
  2. Your income
  3. Your down payment

“If your credit is acceptable, a lender can give you a prequalification and an idea of the amount you can borrow,” he says.

A preapproval takes this a step further. Usually, you will actually submit a mortgage application with your lender and provide them with some basic income, asset and debt documentation. Usually, you’ll also pay a fee to the lender which will cover pulling your credit report and the cost of an appraisal if you should find a house to buy.

The lender or broker will then run your financial information through an automated underwriting system that checks your credit and debt-to-income ratio and generates a preapproval letter if you qualify. This is also known as issuing you a “conditional commitment.” However, a key missing element in the transaction is the return of a satisfactory appraisal on a house, which you’ve signed a contract to buy – and updates to any documents you’re provided.

Should I be preapproved by multiple lenders?

"You can get preapprovals from multiple lenders, but it's probably not cost effective," says Keith Gumbinger, vice president of HSH.com. "When you enter the preapproval process with a given lender, you are actually starting the process of obtaining a mortgage from them. As such, the lender will usually collect certain fees to cover the cost of obtaining your credit report as well as for an expected future appraisal on a property you choose. These fees can amount to several hundred dollars, and they will not be refunded to you should you decide to continue the mortgage process with another lender."

Because of this, it's usually better to pick a lender and stick with them from start to finish. This doesn't mean you shouldn't shop around and talk to lenders about your needs and evaluate their offerings and their ability to meet your mortgage goals. However, it does mean that you should shop first, choose wisely and be prepared to move forward with your transaction.

Discuss loan options with your lender

Turano says a good lender will ask a lot of questions during preapproval about your budget and your cash availability in order to offer some guidance on loan programs.

"Even within a 30-year fixed-rate loan program there are lots of options for FHA, VA and conventional loans," says Turano.

Turano provides borrowers with a maximum loan amount, including estimated closing costs and monthly payments based on the projected down payment.

"I educate borrowers on the merits of various loan programs and run through different scenarios based on what they feel they can afford for their cash investment and their monthly payments," says Peter Boyle, a senior loan originator at Summit Mortgage Corporation in Plymouth, Minnesota.

Prepare for future financial challenges

While the lender can provide you with a maximum mortgage amount that your income will support, you should also consider how much mortgage debt you are comfortable handling. It’s a good idea to keep in mind that there will be other and unexpected costs of owning a home, and stretching to borrow every last dollar for your mortgage could leave you unprepared for future financial challenges.