Mortgage Loan Pre-Qualification

A mortgage loan pre-qualification is essentially an estimate of how much you can afford to spend on your future home in conjunction with how much money a lender would be willing to give you. The pre-qualification process is much simpler than that of a pre-approval, and because of this, it is often suggested to obtain one before you even start looking for a home.

The best way to get pre-qualified is to consult with a lender regarding your assets, income, and down payment bracket. There is typically no cost or commitment to this type of meeting. This is a great option for people who are not sure about purchasing a home, but would still like to see what they could potentially qualify for if they decided to do so.

Pre-qualification is a helpful first step in the home buying process, but it does not guarantee a loan. For this reason, pre-approval is a more thorough way to ensure you are as competitive as you can possibly be when you start house hunting.

Pre-Approval for a Home Loan

If you are pre-approved by a bank or mortgage broker, this means that you have a vague commitment from a specific mortgage lender for future funding. With a pre-approval letter, you supply the mortgage lender with physical documentation of your income, your assets, and your debts. Your bank will typically run a credit check in order to verify all of your employment and financial information, which may include a fee. Once your bank has approved your finances, you will receive a letter of commitment from your lender, stating the amount of money that their bank will loan to you for the purchase of your home. Once you have this pre-approval, you can start shopping around for a home. Real estate agents and sellers tend to take pre-approval more seriously than pre-qualification.

Pre-Approval: Not a Guarantee

A pre-approval is not, under any circumstances, a firm guarantee that you will receive a mortgage loan, though it is likely. Other verifications, such as a title search and property appraisal, are necessary before you will receive your loan. The pre-approval is also a non-binding agreement and you are free to seek a different lender for your loan, but the application process tends to be more efficient if you stick with the same company that pre-approved you.

Ultimately, pre-qualification and pre-approval are helping steps when beginning your home search, but pre-approval packs more of a punch in terms of credibility. Regardless, these terms are useful and important to know when first researching and starting the process of buying your own home.

How can a mortgage be denied after pre-approval?

A mortgage can be denied after pre-approval if a buyer no longer meets the requirements of the loan. Here are some reasons a lender may deny a loan:

• Negative credit change. If your credit score was hovering around the requirement (say 620), and you missed a payment during your home search or racked up more debt, your credit score dips. This negative impact on your credit score could keep you from getting a home loan.
• Open more lines of credit. By opening more lines of credit, you are getting deeper in debt. Too much debt looks risky to lenders.
• Change of employment. Lenders don’t only look at how much income you make, but also your history of holding a steady job. Some loans have requirements for length of consistent employment (typically two years). Starting a new career in the middle of your home search means you would not hit that requirement.
• The property doesn’t meet mortgage contingencies.  During the home inspection and appraisal process, you will find out if the property meets all of the mortgage contingencies. If it does not, you will not be able to obtain a loan.

Tips to ensure a Mortgage Approval

What can you do to make sure you make it to closing day with a loan? Keep your financial situation the same (or better) than it was when you got pre-approved.

• Do not incur more debt. You might be looking at new furniture for your dream house, or want to book a vacation. Wait to do this after closing.
• Do not make any large deposits. If you don’t have proof as to where large deposits come from, this can be very suspicious to lenders.
• Do not withdraw large amounts of money. On the other end, don’t take out a large sum of money for no reason.
• Add to your savings. Before getting pre-approved, you probably saved up for a down payment. Keep adding to this savings on your regular schedule.