Learn how to get preapproved for a loan. You’ll know how much you can spend, you’ll be in a better position to negotiate, and you’ll understand the costs of your loan before pulling the trigger.
Manage Your Credit
Before starting the preapproval process, get familiar with your credit and how credit works. Review your credit reports to be sure there are no errors. Mistakes can hold up the process and prevent you from getting the loan you deserve. Mistakes can also be fixed, but the process can take a while.
Pick a Lender
Shop around for a good lender. Check with banks, credit unions, and online lenders to see what they offer. They all cater to different borrowers, so figure out which one is the best fit for you. A local credit union is often a good starting point, but credit unions do not always offer the best rates.
Find out what each lender’s interest rate and fee structure would be. If you’d like to have the option of paying off the loan early (who wouldn’t?) then investigate prepayment penalties. Finally, make sure it’ll be convenient and affordable to pay the way you want to pay -- by paper check, bill pay, or electronic transfer.
When you get preapproved, your lender will need information from you. Gather that information ahead of time so your application can sail through the underwriting process. Lenders will want to know about your finances. You’ll need to document how much you earn (you need income to repay the loan), and it may help to show that you have other assets available to you (such as cash in bank accounts). Your lender may ask for the following items, and more:
- Pay stubs
- W-2 statements
- Tax returns
- Bank account statements
- Other account statements
You may also have to provide information about the thing you’re buying. If it’s a house, is it a single-family residence, or is it a condo unit in a building with 50 units? If it’s a car, what is the make, model, and year? The more detail you have, the better -- your lender’s offer may change depending on what you want to buy.
Apply for the Loan
Once you’ve picked a lender and prepared yourself, it’s time to apply. There’s only one way to find out how much you can get: fill out an application and wait for an answer. An offer may come quickly, or it may take a while. Lenders do a quick once-over when you get preapproved, so you should have an answer within one day.
Be aware that some lenders claim to preapprove you without really looking at your finances. If they don’t run your credit or ask about your income, it’s a bad sign. You want a preapproval that actually means something, and lenders can only make a realistic offer if they know something about you. If you get a bogus preapproval, you may later find out that you can’t really borrow as much as you hoped.