In the simplest terms, a mortgage preapproval is just what it sounds like: a letter from a lender stating that a prospective home buyer has been preapproved for a mortgage of up to a certain amount.

While it’s important for a buyer to have a preapproval in hand before making an offer on a home, being preapproved for a mortgage is not the same thing as actually having secured a loan, and not a guarantee that you’ll be given one. (A preapproval is also not the same thing as a “prequalification,” though the two are often confused. Many lenders will email would-be buyers a prequalification letter based on information the user has input themselves—essentially, it’s an estimate of how much of a loan someone might qualify for, similar to using an online mortgage calculator.)

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To secure a preapproval, a buyer needs to work with a bank or a mortgage broker and fill out an application with information about their employment history, income, assets, expenses, debts and other financial information.

A buyer needs to work with a bank or a mortgage broker to to secure a preapproval. Photo: Pixabay

The lender will perform a credit check, then issue the preapproval letter, which is good for a set amount of time, often 90 days. (Because of the credit checks involved, the preapproval process can temporarily lower a buyer’s credit score.)

Once a buyer has had an offer accepted on a property, the next step is to contact their lender for a mortgage commitment letter or an approval letter, which is official documentation that their loan has been approved. Before issuing a commitment letter, the lender will verify not just financial information about the buyer, but about the property itself to ensure that it is making a stable and sound investment.

Many factors can stand in the way of taking a preapproval to a commitment letter, including issues that come up during the property’s appraisal or title search, as well as changes in a buyer’s financial circumstances. 

For this reason, many buyers who plan to use financing ask for a mortgage contingency clause in their contracts, meaning that if their planned source of financing fails to come through, they can walk away from the deal with their full deposit. 

Sellers are often less enthusiastic about contingencies in contracts, and the comparatively slow process around financing is one of several reasons cash buyers often beat out those who are purchasing with financing. A prospective buyer who has a preapproval for a mortgage will be considered a more serious candidate than a buyer without one, but because a preapproval is not a guarantee of an eventual loan, cash buyers are still considered more secure.