You’re scrolling the online listings, looking for houses, when — boom! — the love of your real estate life pops up on the screen. It’s the perfect home, with your dream location, layout, size, finishes, and price. Suddenly you’re ready to buy!
Just one thing: You haven’t started looking for loans yet. And the seller will accept offers only from preapproved buyers.
Not a problem. You can get a loan tomorrow, right?
Not so fast.
You can’t just get a loan overnight. You have to go through key steps, from prequalification to preapproval to the mortgage approval itself. But even if you could, a 30-year loan isn’t something to jump into without at least doing some comparison shopping. Follow these steps to land the smartest loan.
Step 1: Shopping for loans
You wouldn’t buy a car, furniture, or appliances without shopping around, would you? So you definitely shouldn’t sign up for a 30-year loan without some serious research.
Compare mortgages online, or visit your local bank or credit union. Schedule a meeting with a mortgage loan officer, who will pull your credit and give you a reasonable estimate of the interest rate, closing costs, and terms you can expect. From there, expand your search to other financial institutions in your community or continue online.
The Fair Isaac Corporation, or FICO, allows people to rate-shop for a mortgage without repeatedly “dinging” their credit scores. However, you need to do all of your shopping within a 14-day window for credit bureaus to ignore subsequent “dings” every time you pull your credit.
Pro tip: Pay attention to the annual percentage rate (APR), not just the interest rate. The APR covers the total cost of borrowing, including loan origination fees and other ancillary costs.
Total time: 14 days.
Step 2: Get a prequalification letter
Most sellers will require your prequalification letter before they’ll even consider your offer — but don’t worry, this step is quick and easy (really).
Ask any of the lenders you spoke to during your mortgage shopping spree for a prequalification letter. These are relatively simple to get and they just give a rough, unverified estimate of the loan size you may qualify to receive. Most lenders will give you a prequalification based on your verbal self-reporting of your income, assets, debts, and down payment size.
Pro tip: You don’t have to get a loan from the same lender that gave you a prequal letter.
Total time: 1–3 days (overlapping with Step 1).
Step 3: Get preapproval
The preapproval stage is when lenders verify everything you’ve told them. You’ll need to supply proof of income, proof of assets, proof of employment, records of any debts you hold, and of course identification documents (such as your Social Security card) and a credit report (which the lender will run).
If you have a simple situation — e.g., you have stable employment with no debt — this process can be as short as one to two weeks. If you’re self-employed, own several other houses, have had a divorce or bankruptcy, have a pending court case or lawsuit against you, are in the U.S. on a temporary visa, or have other complicating factors, the loan officer may require additional documentation, which can extend the process several weeks or months.
Once you’re preapproved, you’ll receive a conditional letter stating the exact amount of loan for which you’re approved.
Pro tip: Sellers prefer to work with buyers who have preapproval letters rather than prequalification letters (all else being equal).
Total time: 1 week to several months.
Step 4: Final loan approval
Armed with your preapproval letter, you make an offer on your dream home and it’s accepted. (Hooray!) Next, you’ll need the lender to conduct an appraisal.
In this instance, an appraisal is official verification that you’re buying the home at a reasonable market value. It protects the lender from the risk of lending an unreasonable sum. (For example, lending $300,000 on a house that should be valued at $220,000.)
Scheduling a time for a licensed appraiser to visit the property is frequently the longest part, and may take up to two weeks (depending on availability in your area, as well as the flexibility of the seller). Once the appraiser makes a home visit, the approval (or rejection) comes through within a day or two.
Total time: 3 days to 2 or more weeks.
The good news? Now that you’ve passed the appraisal process, you’re ready to close on this loan — and a house. Well done!