How long does a mortgage preapproval last? A timeline for homebuyers
Buying a home is like participating in a triathlon, with intense competition and multiple stages to navigate.
Mortgage preapproval is often the starting point that provides a competitive advantage. It shows sellers you are a serious buyer, determines your budget, and focuses your search.
The problem is, the home buying process can take significant time, which is why so many potential buyers ask, "How long do mortgage preapprovals last?"
What you need to know about the mortgage preapproval timeline
Most mortgage preapprovals last between 60 to 90 days because credit scores and interest rates, which affect your maximum purchase price, are constantly fluctuating.
If you don't find a house within those two to three months, you can always contact your mortgage lenders to renew your preapproval.
Common myths about mortgage preapprovals
Preapprovals are a fundamental element in the home buying process, yet they are often surrounded by misconceptions such as:
Preapproval guarantees a loan
According to the Consumer Financial Protection Bureau (CFPB), "A prequalification or preapproval letter is a document from a lender stating the lender is tentatively willing to lend to you, up to a certain loan amount."
The key word is "tentatively." Your mortgage preapproval may not always result in a loan because:
- Your financial situation has changed (e.g., you took on a new debt or lost your job).
- The property you wish to buy has problems (e.g., it requires significant repairs or is worth less than what you offered to pay).
- You can't provide documentation to verify your income, employment, assets, and debts.
- You have changed your mind about the property you want or the price your willing to pay.
- You can only get preapproved by your current bank.
While you may trust and feel more comfortable with your current bank, you can get preapproved from any mortgage lender, including other banks, credit unions, and mortgage brokers.
So it's a good idea to get preapproval from several lenders before house-hunting. Doing so allows you to compare interest rates and terms and ultimately secure the best deal.
One downside is that lenders conduct a hard credit check before issuing a mortgage preapproval, and that can lower your credit score by a few points.
Fortunately, there is a grace period. If you're applying for preapproval from several lenders, do so all within 14 days because it will only count as a single hard inquiry on your credit report.
You need a 20% down payment to get preapproved for a mortgage
A 20% down payment is optimal to avoid paying Private Mortgage Insurance (PMI), which protects lenders in case of loan default (payments end once you have built up 20% equity in your home).
While a larger down payment often leads to better loan terms, Chase Bank, Ally Bank, and other mortgage providers also offer options that require only a 3% down payment, making homeownership more affordable.
How to increase your mortgage preapproval amount
If you're dissatisfied with the mortgage amount you are preapproved for, there are measures you can take to increase it.
Improve your credit score
To secure a conventional loan from a bank, credit union, or private lender, you should have a minimum credit score of 620. Anything lower could result in not being approved or in a higher interest rate.
Alternatively, for Federal Housing Administration (FDA) loans, a credit score between 500 and 580 is required. Still, a higher credit score results in a larger loan amount and lower interest rates.
Pay off debts
When a lender assesses your borrowing capacity, they will consider your monthly debt obligations in relation to your gross monthly earnings.
A high monthly debt will result in a lower preapproval amount. For example, if you have a monthly income of $5,000 and a total monthly debt of $2,000, your debt-to-income (DTI) ratio is 40%—the maximum limit for most mortgage lenders.
But if you pay off your personal loan—let's pretend it is $500 per month—your total monthly debt decreases to $1,500, resulting in a DTI of 30%. A lower DTI demonstrates you have more disposable income available to cover your debt payments, making it less likely you'll default on your loan.
Apply for a longer loan term
When you extend the term of your mortgage, your monthly payments will be lower because your loan balance spreads out over a more extended period.
For example, a 30-year fixed-rate mortgage typically has lower monthly payments than a 15-year fixed-rate mortgage. As a result, a lender may be more willing to lend you a higher amount.
Consider a joint application
If one borrower has a high credit score and the other has an average score, their combined score may be stronger and make you eligible for a larger loan amount and more favorable interest rates.
Remember, though, to acknowledge the potential downsides of a shared mortgage. In the event that one of the borrowers fails to make payments, the credit ratings of both parties can be negatively impacted.
How to renew your mortgage preapproval
To avoid gaps in your home-buying process, contact your mortgage lender before the expiration date so you can continue your house search without interruption and ensure that your interest rate and loan amount are accurate.
Keep in mind that you will need to provide updated documentation for your preapproval, such as pay stubs, bank account statements, and other assets.
Remember the loan amount and terms may change with the new preapproval letter and that your credit score may be affected because your lender will need to conduct another hard credit check.
Next steps toward home ownership
Like a triathlon athlete who must maintain their stamina and endurance throughout the race, it is crucial for you to maintain the necessary requirements to keep your mortgage preapproval valid.
This entails monitoring your credit score, income, and debt levels. With the right timeline and preparation, you can successfully navigate the preapproval process and be happily on your way to homeownership.