Mortgage Preapproval: What It Is and What Breaks It

A preapproval letter is a piece of paper a stranger wrote about you, and its only job is to make a seller take your offer seriously. It is not a loan. Nothing about it obligates the lender to fund anything.

That sounds cynical until you've watched someone's financing collapse eleven days before closing because they bought a truck. Understanding exactly what a preapproval is — and precisely what breaks it — is the difference between a stressful closing and no closing.

Prequalification versus preapproval, and why the words barely matter

The textbook distinction is real. In the CFPB's words: "Some lenders offer a prequalification letter based on unverified information that you report and will only issue a preapproval letter based on verified information." Unverified means you told them your income. Verified means they looked at your pay stubs.

But the CFPB immediately undercuts the vocabulary, and this is the sentence to carry into every conversation: "Lenders' processes vary widely, and the words they use don't tell you much about a particular lender's process."

So don't ask for a preapproval. Ask what was actually done. Three questions, in these words: "Did you pull my credit? Did you review my income and asset documents, or just what I typed in? Has an underwriter looked at this file?" A letter backed by documents and an underwriter is a different object from a letter generated by a web form, and both may be called the same thing.

Neither is a promise. Per the CFPB, a preapproval "is not a guaranteed loan offer, but it should provide enough information for sellers in your area to take it seriously." Some lenders go further and issue "a written commitment letter valid for a certain period of time to extend a loan up to a specified amount subject to limited conditions." If you're competing hard, ask whether your lender writes those — it's a meaningfully stronger document, and listing agents know the difference.

The documents, gathered once

Every lender wants the same underlying evidence: what you earn, what you own, what you owe, and who you are. Assemble it once as PDFs in one folder and you'll re-use it at every lender you shop.

• Two years of W-2s, and the last two federal tax returns with all schedules. Self-employed or 1099: two years of returns plus year-to-date profit and loss, and expect deeper questions.
• 30 days of pay stubs, and the most recent two months of statements for every account holding money you'll use — checking, savings, brokerage, retirement. All pages, including the blank last one.
• Photo ID and Social Security number for the credit pull.
• Documentation of any other income you want counted: child support, alimony, pension, Social Security award letters, rental leases.
• An explanation, in advance, for any deposit that doesn't look like payroll. This is the item that delays the most files.
• If you've had a bankruptcy, foreclosure, or short sale: the discharge or settlement paperwork, because you'll be asked.

Check your credit reports before any of this. You can get them free at annualcreditreport.com, and an error you find in March is a nuisance while an error you find in July is a dead deal. This site's guide to reading a credit report covers what to look for.

What the number actually comes from

Lenders back into your maximum from debt-to-income. The CFPB defines it plainly: "Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income," and notes that "Different loan products and lenders will have different DTI limits." There is no universal ceiling — but watching the arithmetic run makes clear why the answer moves so much.

Suppose a household grosses $8,000 a month and a lender is working to a 43% total ceiling:

1. 43% of $8,000 is $3,440. That's every debt payment including the future mortgage.
2. Existing debts: $450 car, $280 student loan, $120 in card minimums. Total $850.
3. $3,440 minus $850 leaves $2,590 for the full housing payment.
4. Property taxes, homeowners insurance, and HOA dues run $600 of that, leaving $1,990 for principal and interest.
5. At 6.65% over 30 years, $1,990 a month supports a loan of about $310,000.
6. At 7.15%, the same $1,990 supports about $295,000. Half a point of rate moved your buying power by $15,000.

Two things fall out of that. Paying off the $450 car loan doesn't save you $450 — it moves $450 into the housing line and buys roughly $70,000 more house. And the preapproval amount is a moving target that drifts with rates while you shop, which is why letters expire.

How long it lasts

Most preapproval letters carry an expiration on their face, typically 60 to 90 days. The clock exists because the inputs go stale: credit reports age out, pay stubs and bank statements have to be recent at underwriting, and the rate assumption behind your maximum drifts.

Renewing is usually a matter of sending fresh statements and stubs and getting a new letter — and often a new credit pull, which is fine. Multiple mortgage credit checks inside a 45-day window are recorded on your credit report as a single inquiry, and the CFPB's guidance is that even beyond that window "the effect of an additional inquiry is small, while shopping around for the best deal can save you a lot of money in the long run."

Use that window deliberately. Get preapproved by three or four lenders in the same fortnight, then request Loan Estimates — the lender must provide one within three business days of your application — and compare the standardized forms rather than the sales pitches.

The things that kill a preapproval before closing

Underwriting re-verifies almost everything shortly before funding. Employment gets re-checked. Credit often gets re-pulled. Bank statements get refreshed. Anything you changed in between is now a new fact in your file.

1. New debt of any size. A financed sofa, a new card, a phone on installments, a car. Each one raises your DTI and each one shows up. Furniture financing between contract and closing is the single most common self-inflicted wound in this process.
2. Co-signing for someone else. The payment counts as yours even though you'll never make it.
3. Changing jobs. A lateral move in the same field with the same pay structure is usually survivable. Going from salary to commission, from employee to contractor, or into a probationary period usually is not — at least not until you have history at the new arrangement.
4. Large unexplained deposits. Underwriters need money to be sourced and seasoned. A $9,000 deposit from your parents needs a gift letter, not an explanation on the phone. Cash from a private sale needs a paper trail you may not have.
5. Closing old accounts or paying a collection at the wrong moment. Both can move a score in unexpected directions right when it's being re-read.
6. Letting a payment go late on anything at all. One 30-day late on a card can move your score enough to reprice or sink the loan.

The rule between preapproval and keys is to change nothing. No new accounts, no closed accounts, no job moves, no unusual money. If something unavoidable happens — a layoff, an inheritance, a medical bill — tell your loan officer the day it happens. Underwriters can work around facts they learn early and almost nothing they discover late.

Don't shop at the top of your letter

The maximum on a preapproval is a legal and mathematical limit, not a recommendation. It's calculated from your gross income before taxes, and it knows nothing about your childcare bill, your retirement contributions, the water heater that's going to fail in year two, or how you feel about money.

The reliably better move is to decide your own comfortable payment first — total, including taxes, insurance, and HOA — and then ask the lender for a letter written at that number rather than at their ceiling. Lenders will happily issue a letter for less than you qualify for. It also makes a cleaner offer, because a letter written for exactly your offer price doesn't advertise to the seller that you could have gone higher.

And if you get declined, you're owed an explanation. The CFPB notes that lenders who check your credit and determine you don't qualify must provide an adverse action notice. Read it — it names the specific reasons, which is a free roadmap to the version of you that gets approved next spring.

Start this week by pulling your three credit reports and building the document folder. Preapproval takes days once the paperwork exists and weeks when it doesn't, and the house you want will not wait for you to find your tax returns.