I recently had a client ask me this question after having this disheartening experience with one of the local lenders. This client thought he had done everything right and that the pre-approval was set in stone. This wasn’t the case and I thought this experience could help others understand. Here is an explanation on the pre-approval process.
First of all, congratulations in making the decision to purchase a home and take on the responsibilities of home ownership. You’ve done your due diligence and decided to get pre-approved before buying a home and before contacting a real estate agent. A pre-approval is advised so it’s a good move. But who does pre-approvals? Good question! Many lenders and mortgage brokers only do pre-qualifications. The difference between a pre-qualification and a pre-approval is basically the level of scrutiny. A pre-qualification is where your financial situation is looked at and a number is given out as the amount that the lender might be willing to lend to you. It’s quick, easy and essentially worthless.
So what do I do to ensure I get a pre-approval and not a pre-qualification? The pre-approval process goes deeper, so be prepared to provide personal information in order to create a credit application. You will also be required to provide documents to verify your income and information about your assets and current debts. Your credit score will be pulled at this stage, with your written permission, of course. Your application is then submitted to the lender where they review and qualify your specific financial situation and based on the information provided to them will offer an acceptance, leaving only the property itself to qualify.
The advantages of a Mortgage Pre-Approval:
- It helps you identify any problem areas that may need fixing in terms of mortgage approval.
- It helps you get a reputable real estate agent, since most of them won’t work with buyers until they’ve been pre-approved.
- You will know the maximum amount of home you can afford to purchase.
- It helps you narrow down your house shopping to the types of homes you can actually afford
- It will help you determine exactly how much money you need to have ready for the down payment and closing costs.
A Mortgage Pre-Approval does not guarantee you will get the loan
It is important to know that a pre-approval does not guarantee you will get the loan. If any of the criteria used in your pre-approval change between now and your scheduled closing date, you could be denied the loan. The only time you can be 100% certain of your mortgage approval is when you close the deal. Up until that time, there are some things that can derail the process.
Here are some examples of what can derail the approval process:
- Your income or employment has changed – you were pre-approved based on the status of income and employment, so, if you change jobs or have a lower income, this can cause you to be denied a mortgage. It obviously won’t hurt you if you get a raise but what if you or your spouse loses a job? Or, what if you suffer some other kind of income loss? This will affect everything from your debt ratios to your basic qualifications.
- Taking on substantial debt after the pre-approval. Many lenders require you have a debt ratio of no higher than 42%. (The debt ratio is a comparison between the amount of money you earn and the amount you spend to cover your monthly debts). Increasing your debts with credit card spending, co-signing loans, leases, loans or mortgages could put your ratios over the allowable limits.
- Your property doesn’t fit with the lender’s qualifying criteria. Your lender will want to know the home you purchase is worth the money they decide to loan for your mortgage. They may not borrow outside the parameters in which they are comfortable lending. Some common property exceptions include mobile homes on leased land or large acreages in remote areas.
- Making large purchases after the pre-approval. Your lender will review your bank account before the final approval of your mortgage to ensure you have enough money for the down payment, related expenses such as closing costs, moving costs, etc.
- Your credit score drops. You were approved with a score within the allowable limits with the lender but months later, when you’re ready to purchase, your credit score has dropped below the lender’s allowable limit.
So, the best thing you can do after you have been pre-approved is to maintain your present circumstances until the closing date of your purchase. Don’t spend the money that was saved for the down payment and closing costs, don’t switch jobs, don’t increase your debts, continue to put aside as much money as possible and ALWAYS make the offer to purchase subject to the condition of financing.