Mortgage preapproval is the process of determining how much money you can borrow to buy a home. To preapprove you, lenders look at your income, assets and credit score and determine what loans you could be approved for, how much you can borrow and what your interest rate might be.

Preapproval and prequalification are both ways of understanding how much you’ll be able to get approved for. There are some slight differences between these two processes, though some lenders use these terms interchangeably.

A mortgage prequalification is like a preapproval, but it may not be as accurate. With a prequalification, you won’t have to provide as much information about your finances, and your lender won’t pull your credit.

Without your credit report, your lender can only give you estimates. This means the approval amount, loan program and interest rate might change as the lender gets more information. Because a prequalification is an initial review of your finances, you usually don’t need to supply documentation (like bank statements and pay stubs) during this stage.

Preapprovals are more in-depth than pre-qualifications. When you get preapproved, you may be required to provide information or documents like bank statements and pay stubs to prove your income and the funds you’re using to get the loan. A preapproval will also require a hard credit check so your lender can get your credit score and see how much other debt you have.

A preapproval is helpful when you’re shopping for a home, but you’ll need to get a full approval once you find your home, and simply gettinga preapproval before you start looking at properties For your lender, this process includes making sure the property details check out.

Here are a few property details your lender will need to approve:

• The appraisal value: Your lender will order an appraisal of the home to make sure you’re not paying more for the home than it’s actually worth. An appraisal that comes back lower than the purchase price could pose problems for your loan.
  
• The title: Your lender will work with a title company to confirm who owns the property and make sure there are no claims or liens against it.
• The home’s condition: Some loans require that the property meets certain standards before the loan can close. For instance, if you’re purchasing the home with an FHA loan, things like cracked windows, missing handrails or a roof in poor condition could keep the loan from closing.

Before you’re preapproved for a home loan, work with your lender to verify your financial information and obtain a loan estimate. Let’s walk through each of the steps and review the parts of the process you’ll be responsible for.

The preapproval process is essentially a mortgage application. This means your lender or loan officer will want to take a comprehensive look at your finances. You should be prepared to provide information on the following:

• Proof of income
• Employment verification
• Proof of assets
• Credit history
• Identification
• Debt-to-income ratio (DTI)

Before starting the preapproval process, you'll want the necessary documentation to ensure the process goes smoothly. Here are a few items you should have on your mortgage preapproval checklist:

• W-2 statements
• Pay stubs
• Bank statements
• License
• Social Security number

Once you've submitted all your information to the lender, you can expect to receive your loan estimate within 3 business days, though this may be much shorter if you use an online mortgage lender. The loan estimate will let you know whether you've been preapproved and for how much.

Preapproval isn't just for your lender. Knowing how much mortgage you can expect to take out is also highly beneficial to you as a buyer, and it can help you narrow down and focus on your best options.

When you get preapproved, you usually get a preapproval letter. There are a few reasons the preapproval letter is important. First, real estate agents typically want to see your preapproval letter before they show you houses. This ensures they don’t waste time showing you homes outside your budget.