DID YOU KNOW there’s a bit of a misconception that once you’re “pre-approved” that you’re good to go! All pre-approvals aren’t created equal and if you’re going to depend on one, you really should understand their limitations.
Being pre-approved simply means that based on your CURRENT financial situation eg income, expenses, down payment, credit history, and debt ratio etc that you “should” be able to get fully approved once you find the perfect property!
Many lenders just confirm that you meet their general guidelines and won’t even check your credit and sometimes use a basic mortgage calculator saying everything looks good. They usually just provide a rate guarantee and it’s a bit of a red flag if they don’t ask for documentation in order to confirm qualification. Only an underwriter can confirm that your numbers meet their approval.
Choose a lender who will review your application and your documentation BEFORE granting a pre-approval, unless of course you have 20% down, rock solid employment with provable income, perfect credit, and very low debt.
The real issue with being pre-approved is that the lender doesn’t know yet which property you’re going to purchase; maybe you’ll find the house of your dreams and it turns out to be a grow-op. Most lenders won’t even look at it even if it’s been completely remediated, but if they do they’ll usually require a more substantial down payment and additional air quality testing [another out-of-pocket expense for you!]
Pre-approvals do have some benefits though…
the 90-120 day rate guarantees protect you if rates sky rocket while house hunting
real estate agents and sellers take you more seriously
they are FREE
Appraisals are the key here and while they’re obviously not done at the pre-approval stage, they are mandatory when getting a mortgage. Even when you get an appraisal prior to making an offer, you can’t rely on them to identify every single problem with a property which is especially true for condos because due to cost and time restraints, appraisers usually can’t review minutes, finances, and engineering reports etc. Risks like contingency reserve deficiencies, structural issues, and/or special levies can pop up and ultimately make a pre-approval worthless.
THE BOTTOM LINE…
A “subject to financing” clause when making an offer is uber important and is definitely your best protection as it offers a way out should you need it, and you won’t lose your deposit in the interim. By the way, job changes, increased debt, and/or co-signing for someone can void your pre-approval. If rates have stayed low and you’re still house hunting, maybe re-set your pre-approval if you can every 45 days or so; this will extend your rate hold and protect you if rates jump before closing.
“Where thou art, that is home.” | Emily Dickinson
Angela West-Roots
Latest posts by Angela West-Roots (see all)
- A FEW WORDS ABOUT APPRAISALS! - July 8, 2016
- HOW TO FIX BAD CREDIT! - March 29, 2016
- WHEN IS A PRE-APPROVAL NOT A PRE-APPROVAL! - March 28, 2016