Getting a preapproval has long been considered the first step in lining up a mortgage to buy a home. But like so many other things in the housing market these days, that's increasingly not the case.

Large lenders are cutting back on preapprovals, offering far fewer than they did prior to the crash. In fact, many large mortgage lenders no longer offer them at all.

A preapproval is a written statement saying that a bank is willing to lend a borrower up to a certain amount of money at a certain rate. Although not legally binding, preapprovals have been considered a useful tool for borrowers to have in shopping for a home, as it gives them an idea of what they can afford and how much they can borrow. It also gives them something to show a home seller when putting in a bid on a house, as evidence they'll be able to get a loan that will support it.

Used on only 4 percent of all purchases

Among the top 25 mortgage lenders last year, only 30,000 preapprovals that resulted in mortgages were issued, compared to more than 100,000 in 2007, the year before the crash, according to recent figures from the Federal Financial Institutions Examination Council.

That's not just a result of the overall slowdown in the housing market; the Council's figures show that only 4 percent of purchase mortgages followed preapprovals last year, down from 9 percent in 2007. And 14 of those 25 lenders offered no preapprovals at all last year.

Less competition, lower home values seen as factors

The main reason for the decline in preapprovals appears to be that lenders no longer feel compelled to offer them. Prior to the crash, preapprovals provided a way for lenders to get customers in the door and ensure they stayed with that lender when they were ready to get a loan. But with so many lenders having gone out of business in the downturn, competition for customers isn't as steep as it was, and lenders don't feel as much need to offer them.

Falling home values appear to be a factor as well. It appears that borrowers with a preapproval would sometimes put in an offer on a house, only to find the appraisal wouldn't support it. So the borrowers might conclude the bank was reneging on its commit and become upset.

There is an alternative. According to a report in the Wall Street Journal's MarketWatch online news service, some major lenders such as Bank of America and JP Morgan Chase are offering pre-qualifications instead of pre-approvals. This gives borrowers an idea of how much they can borrow, based on their credit score and assets, but doesn't give them a written commitment they can show a home seller when making an offer on a home.

Published on August 11, 2009