Preapproval is a more serious step toward buying a home. It is a conditional commitment in writing for a specific loan amount and loan program. Provided you meet the conditions specified, the lender is obligated to go through with the loan (however, you are free to walk away from this commitment before anything is signed.) It will also give you a general idea of your interest rate and potential monthly payment.
Getting a preapproval before you make an offer can give you an edge with sellers because they'll know you're ready to take action. This can strengthen your negotiating position, especially if you are competing with other offers or want to make an offer well below the asking price. A preapproval lets everyone know you're serious and able to close the deal.
These are some of the documents you'll need to provide to get preapproved:
- W-2s for the two most recent yearsFederal income tax returns if you're self-employed or own 25% or more of a business
- Pay stubs covering the last two months
- Bank statements for all your accounts (checking, savings, investments, retirement, etc.)
- Current debts, including the current balances and minimum monthly payments of all credit accounts (loans, credit cards, child support, etc.)
When you are finished with the process, you'll receive a preapproval letter to show sellers. Be aware that preapprovals depend on interest rates, which can change. (So if rates increase, this would likely decrease the loan amount for which you are preapproved.) Your preapproval can also be affected by the value of the home you choose. For example, if a home appraises for significantly less than the agreed-upon purchase price, the lender may not approve the loan because they won't want you to pay more for the property than it's worth. Stay in close contact with your lender even after you receive your letter so you can be updated on any changes that occur.