Preapproval Before Fall Open Houses: CFPB's 45 Day Window

The week after Labor Day is when Greater Boston open houses fill back up, and the buyers who get caught out are usually the ones who found a house before they’d talked to a lender. Get the preapproval letter first. The Consumer Financial Protection Bureau (CFPB) has spelled out the timing.

The 45 day window

CFPB’s answer to whether shopping around hurts your credit is no. Within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit report as a single inquiry, because other lenders realize you’re only going to buy one home. The impact on your credit is the same no matter how many lenders you consult, as long as the last credit check is within 45 days of the first. Even a check after the window closes is usually worth it. In CFPB’s words, 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.

Contact at least three lenders

That’s CFPB’s number, and the reason is money: borrowers who shop around can save thousands of dollars. A preapproval letter doesn’t tell you which lender is cheapest, and CFPB says not to decide on a lender at this stage. Wait until you have an accepted offer and an official Loan Estimate from each of them, the standard form that lays out each lender’s rate and costs. The other reason to talk to lenders before you find a house is speed. Once a seller accepts your offer, you may have as little as a couple of days to line up financing.

What they’ll ask for

Lenders preapprove you by looking at your income, assets, debts, and credit record. They have very specific guidelines about how they count and document income, assets, and the source of down payment funds, and each lender does it a little differently. Bring documentation to the first conversation and ask what else they’d need. If your situation is complicated, self employment for example, start earlier. Check your own credit report for errors before anyone else does. Checking your own credit doesn’t affect your scores, and the report is free at annualcreditreport.com.

Don’t open other credit in the same stretch

The 45 day window is for mortgage inquiries. A credit card, a car loan, or any other new credit results in an additional inquiry that can lower your scores, so CFPB’s advice is to avoid applying for those right before or during the mortgage process.

Prequalification, preapproval, and what was verified

Lenders use the two words differently. Some offer a prequalification letter based on unverified information you report and will only issue a preapproval letter based on verified information. Others just call the letter one or the other. CFPB’s advice is not to worry about which word the lender uses. Ask what assumptions the letter rests on and what documentation they looked at. Both refer to a letter that says the lender is generally willing to lend to you, up to a certain amount, based on certain assumptions. It isn’t a guaranteed loan offer, and getting preapproved doesn’t commit you to that lender.

When to get it

The letter can carry an expiration date, typically 30 to 60 days, which is why many people wait until they’re ready to shop seriously. Getting preapproved early still has a use: it surfaces problems with your credit while there’s time to correct them. If a lender turns you down, they owe you an adverse action notice, a formal notice of the denial, and if a credit score drove the decision, the notice has to include the score they used and how to get a free copy of your report.

Planning on Greater Boston open houses this fall? Send me a note and I’ll tell you what to ask a lender before the first one. Diana Kim, REALTOR®, eXp Realty.