You’ve done your homework and know you need to work with a mortgage professional to get preapproved for a loan. But what does preapproval mean exactly and will it ensure that you’ll be able to purchase your dream home? Follow along as we look at the preapproval process and what you can do to successfully get to the closing table.
Prequalifying vs. Preapproval
You’ve probably heard the term prequalification alongside preapproval, so what’s the difference? Prequalifying for a loan and obtaining preapproval are not the same thing. Prequalifying is a straightforward process in which you discuss your financial pictures with a loan officer to determine if you’re likely to qualify for a home loan and for how much. You don’t submit documents and your credit report isn’t pulled. Think of it as getting to first base in the home-buying game: It puts the ball into play, but there are still a lot of chances to be tagged out.
Preapproval is like making it to third base. “Preapproval is the process by which a mortgage professional such as a broker or bank account executive examines a loan application to determine whether a potential home buyer will qualify for a mortgage,” says Matthew Reischer, an attorney and real estate agent at Flushing Real Estate in New York. At this point, you’ve submitted all of the required documents for review and given approval for a credit report to be pulled.
Does Preapproval Guarantee a Loan?
There’s no denying that you’ve checked what seems like all of the boxes and provided your mortgage professional with a pile of financial documents. But that still isn’t enough to get to home base. According to the Home Buying Institute, “preapproval is not a commitment to lend you money. Nor is it a guarantee from the lender. It is simply the lender’s way of saying they will likely approve you for a certain amount, as long as you clear the underwriting process with all of its checkpoints and requirements. It’s worth repeating: A home loan preapproval letter does not guarantee that you will actually receive financing from a bank, credit union or mortgage company.”
A home loan preapproval letter does not guarantee that you will actually receive financing from a bank, credit union or mortgage company
The Home Buying Institute
How Does Preapproval Help Me Buy a New Home?
Preapproval demonstrates to the seller that your financials are strong and that your mortgage approval process will likely sail through with fewer obstacles. In other words, selling to a buyer who is preapproved offers more assurance that the contract will close. No seller wants to accept an offer and then have the deal fall apart, having lost a week or two of valuable time on the market of being seen by other qualified buyers. In a seller’s market, preapproval can give your offer an edge over other offers.
Going through the preapproval process not only educates you about how you prove your financial health to a lender, but also shows the seller that you are a serious buyer, less likely to back out or fail to secure the loan.
How Long Will My Preapproval Last
Congratulations on getting preapproved! You really have made it to third base. Now, it’s time to take your home shopping seriously because the shelf life of your preapproval is only about 90 days.
Why so short? Remember, preapproval means that home base is in sight. Your banker or broker must be confident that your financial picture hasn’t changed since they granted your preapproval. If your home-buying process doesn’t play out within the designated time frame, you won’t have to start over, but you will need to provide updated financials such as bank statements or a profit and loss (P&L) statement. Your credit report will also be pulled again.
Here Are Some Factors That Can Result in Loan Approval Pitfalls:
Your Employment
The best way to move your preapproval into an approved mortgage loan is to keep your employment steady. Losing or resigning your job will likely derail your application. Accepting a new position within the same profession and at an equal or higher annual salary probably won’t pose a problem, but keep in mind that your new employment will need to be verified. This is also not the time to change primary-earner roles with your spouse or leave your job to become self-employed. It’s best to discuss any potential changes with your banker or broker before making any changes to your employment status.
Your Credit Report
An underwriter will pull an up-to-date credit report and will expect there to be no changes since the previous report was pulled for your preapproval. Do not make any financial changes without first speaking to your mortgage professional. Pay all of your bills on time and do not take out any new credit cards (even the seemingly innocuous ones offered by your favorite retailers). If you’ve carried a balance and plan to pay it off, talk to your banker or broker first as this could draw unnecessary attention to your bank statements.
Your Debt-To-Income Ratio
If your requested loan is pushing the limit of your debt-to-income ratio, do not do anything that will change it. For instance, if you are someone who likes to trade in your car for the newest model and are easily swayed by an appealing auto loan offer, then stay away from the car lots. The same holds true with leasing a car. Planning a big anniversary trip for next year and need to make a hefty deposit now? Pay with cash, not credit.
Major Fluctuations On Your Bank Statements
This is not the time to make large transfers between accounts, accept monetary gifts or add additional accounts.
The best way to move your preapproval to an approved loan is to ensure that everything in your application remains the same. Keep your financial picture steady and don’t make any decisions that could affect it without first discussing them with your mortgage professional. Follow these steps and you’ve got a great shot at scoring a home run.
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