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Getting a pre-approval is an important step in the mortgage process. It shows a seller that you’re a solid buyer who’s likely to secure financing on the home.
In cutthroat housing markets where bidding wars are the norm, a pre-approval is a must in order to remain a competitive buyer.
Yet many homebuyers assume once they get a pre-approval for a mortgage, they’re locked in and good to go. Unfortunately, that’s not the case. A pre-approval doesn’t guarantee you a mortgage.
Here’s what you need to know:
A pre-approval doesn’t guarantee financing
Understand that just because you got a pre-approval doesn’t mean you’ll get a mortgage. That’s because all pre-approvals are subject to verification.
The “pre” is key for context here. A pre-approval is issued before you’ve gone through full underwriting for the loan. It’s not a commitment to lend.
Think about it: how can a lender guarantee you a mortgage when there are still several unknowns in the mix?
The following are a few reasons you could ultimately be denied a mortgage, even with a pre-approval:
- There are issues with property appraisal results
- You miss a payment
- Some of your financial information turns out to be different than originally reported on the application
- You add additional debt to your portfolio
- You change the down payment amount
- Something significant changes in your finances
- Your credit score drops
- Legal problems pop up
- Some other risk emerges that the lender catches while fully vetting you
- You have a change in employment
All pre-approvals are not created equal
Each lender has their own pre-approval process and no two are alike. In fact, the term “pre-approval” is used in different ways by different lenders.
Some lenders issue pre-approvals without getting documentation from the buyer, or verifying their financial information. Others gather minimal information, such as your tax returns, pay stubs, bank statements and credit reports.
A few lenders fully vet your financials before offering a pre-approval.
Understand that the less information you have to provide upfront to get your pre-approval, the shakier ground it stands on.
Those aforementioned unknowns can come back to bite you. Lenders that look deeper into your portfolio are more likely to ultimately approve your mortgage, because they’ve vetted you more carefully upfront.
Tips for getting the strongest pre-approval possible
You know that getting a strong pre-approval can make you a more competitive homebuyer. But how exactly do you do it? Here are some tips:
Get your finances in order
One important thing to do before getting your pre-approval? Make sure your financial picture is sound. It’s a good idea to tackle this step before starting the mortgage process.
That means improving your credit score as much as possible, saving for a solid down payment, and consulting with a financial advisor to make sure you are minimizing any risks in your portfolio.
Having your financial ducks in a row, so to speak, is one of the best things you can do to ensure a seamless lending transaction.
Ask multiple lenders about their pre-approval processes. What financial information do they ask for and verify? Is the pre-approval decided by a loan officer, an underwriter or an algorithm?
Having an underwriter looking at your application is ideal, because they are specially trained to vet your financials.
Meanwhile, an algorithm or a loan officer will be limited in their ability to assess your entire financial picture. Learn as much as you can about your lender options, and how they handle pre-approvals.
Choose a lender who fully checks your financials upfront
When choosing a lender, go with one that thoroughly checks out your financials before issuing a pre-approval.
Think of it this way: would you rather learn about the risks in your portfolio and fix them before you start shopping for a house, or after you’ve fallen in love with a home and are trying to make an offer?
If you’ve ever had the soul-crushing experience of getting denied the home of your dreams, you’d probably pick the former. That’s as good a reason as any to think carefully about the type of pre-approval letter you’d like to have in your hand while home shopping.
The more thoroughly your financials are vetted, the more certainty you’ll have while buying. Choose a lender who will take the time at the outset to really dive into your portfolio and make an informed decision about your pre-approval.
Be meticulous during lending
During the mortgage process, you want to make sure to keep your finances steady.
This is not a good time to take on additional debt, miss a payment, make a big purchase, or drain your bank account. Any of these could be huge red flags for your lender.
Buying a home is a stressful period in your life, and things can—and will—fall through the cracks. But make sure you don’t do anything to jeopardize the finalization of your home loan.
Keep up with your payments and hold off on any big financial decisions or purchases until you’ve got your mortgage squared away and you’re in the home of your dreams.
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