What is a Mortgage PreApproval?
A mortgage pre-approval is the process in which a potential home buyer completes a loan application and provides the necessary documentation to verify that they can indeed be approved for the mortgage they seek.
Why is my pre-approval useless?
As per the definition above, before getting preapproved for a home loan, a lender or broker should check all of the ‘necessary’ documentation along with the full mortgage application before issuing a mortgage pre-approval letter or certificate. This is not the case in most instances. Reason #1 – Your lender is just too busy From the eyes of a mortgage professional, it is much easier to complete a refinance transaction than a purchase. That is just the reality of the business. From the point that you get pre-approved for a loan, it could be as long as 6 months to a year or more before you actually end up finding the home you want and fully applying for the new home loan. Most loan officers or mortgage ‘professionals’ do not want to invest the time or money (yes, it costs money to pre-approve people… the right way) into such a long term prospect that will inevitably require a lot more attention than a simple refinance. But, at the same time, they don’t want to give up that business. Their answer? Pre-approve everyone and deal with it later! The problem here is, you guessed it, that most of those ‘pre-approved’ buyers don’t really qualify and will spend thousands and countless time to later be disappointed. Reason #2 – You weren’t completely honest Let’s face it, it stinks to get denied for anything. Rejection is the worst, especially when you want something very badly. Combine that with the fact that buying a home could be the most important decision you face in your life, and you have a pretty high stakes game at hand. It may be tempting to tell a little white lie about your wife’s past foreclosure, or leave out the fact that you write off most of your income, for example. The important thing to remember here is that by not being completely honest with your loan officer or bank, you are not avoiding denial; you’re simply just delaying it (and costing your family valuable time and money all the while). Some of the most common fibs are:
- Length of time at your job
- Actual income vs. taxable income (banks will qualify you off of your adjusted gross income, not just the gross)
- Previous foreclosures or bankruptcies
Remember, your mortgage broker or banker needs all of the information up front to be able to accurately pre-approve you for that new home purchase. If not, you could end up spending hundreds or even thousands of dollars on wasted appraisals and inspections for a home you may not qualify for. Reason #3 – Your pre-approval is from an online lender It doesn’t take a rocket scientist to figure out that someone hundreds or thousands of miles away may not be able to present the best loan options for you and your family in Florida. How could they? They aren’t even familiar with the area you live in. You would not believe the horror stories I hear from Realtors about deals that didn’t close because of a lazily written pre-approval from an online lender. Buying a home is a very personal and intimate process. You need someone local that could meet you in person and go over any and all questions you may have. Don’t become a statistic, become a supporter for local business and deal with a professional who cares about you and your family. Reason #4 – Your income and assets haven’t been verified This I see ALL the time! If your lender hasn’t asked you for your tax returns, pay stubs and bank statements…you are not pre-approved! There are just so many variables to be considered in the mortgage approval process these days that taking an application just isn’t enough any more. Here are some very common reasons an originally pre-approved loan would be denied down the road:
- The tax returns show ‘unreimbursed employee expenses’ (these have to be deducted from your total income used to qualify)
- There is a business on the tax return showing a loss (this too will be deducted from any income used to qualify)
- Pay stubs show a 401k loan, alimony or child support payments not previously disclosed (usually the borrower forgets to mention it)
- Bank statements have too many large, unexplained deposits or fail to show sufficient funds to close
The bottom line There are just way too many things that can go wrong when obtaining a mortgage preapproval. Please make sure that you choose a professional that is very thorough; it may seem like a pain at first to collect all of the necessary documents, but it truly will save you tons of money and headaches later down the road. As I always say to my clients, “I can tell what you’d like to hear or I can tell you the truth and actually get you into a home of your dreams… the choice is yours”; although honestly, we never let them go with the first option. It’s our job to make sure your home purchase is successful and that is a job we take just a bit more seriously than our ‘competition’.