March 28, 2017

Pre-Approved for a Mortgage, Now What?

Read more about Mortgage

A pre-approval isn't a guarantee of a loan. If you're not careful, you could lose it. Here's what to do and NOT do after your pre-approval.

Congrats, you got pre-approved for one of the biggest loans of your life - a mortgage. Don't get too excited just yet: There's lots to do before you actually get the loan.

Securing a pre-approval is the first step of the home buying process. Without a letter from a lender stating that they're willing to work with you on a mortgage and for how much, you do not know what you can afford. And real estate agents and sellers may not be wiling to listen to you - they will only pay attention to pre-approved buyers. They want to know you are serious and capable of buying the home.

What you do after you get the pre-approval is as important as what you did to secure it. The time between finding the home you want and actually getting the keys to call it yours is when you need to be on your best financial behavior. Make a misstep during this time, and that pre-approval goes out the window. The pre-approval is just the beginning of the process to getting the loan.

A Pre-Approval Is Not a Guarantee

A pre-approval lets you know how much house you can purchase. However, it is not a guarantee. If anything changes between your application and closing date, you can lose your financing. What types of things make this happen? Here's a small list:

  • Your credit score decreases
  • Your income decreases or changes drastically
  • You lose your job
  • You change jobs
  • You obtain new debt
  • You don't have the same amount of assets

How do you make sure these things don't happen? There are a few ways. First, keep everything as consistent as you can. For example, don't change jobs or apply for new credit during this time. Also, don't make any large purchases. Consider your financial life "frozen" until your loan's closing date.

Even if you think one small change won't make a difference - don't do it. You don't know how much your credit may fall with even the smallest change. Your lender is going to scrutinize your financial standing before granting you your loan - they could pull your credit and re-verify your income at any time during the process. If you can put off making any changes that could affect your credit or your income, hold off - it isn't worth taking a chance.

If you must make a change, discuss it with your lender first. They can help you determine if it will negatively affect your pre-approval. Certain things, like depleting your assets to buy a car, are a no-brainer. If you got the pre-approval based on a specific down payment figure, then you can't spend the money ahead of time. Other actions, like taking a higher paying job or paying off a debt, might be a smart move - or may bring you more scrutiny you don't need right now. Talking to your lender first is always the best idea. Even positive changes (your lender may not like job hoppers, for example) can have a negative impact on your loan's approval.

Tip: Don't wait too long! You usually have 90 days to find a home after pre-approval. However, don't wait until the day before you look to talk to a lender. There may be things a lender needs fixed before they can approve you. Things like saving more money for a down payment, paying down debts, and fixing credit report errors are common. Knowing these things ahead of time can help your case. To learn more about obtaining a loan approval, read our article "How to Get Approved for a Mortgage."

Interest Rates Play a Role

You can't control interest rates, but they can control your loan approval. When you get your pre-approval, it may include the interest rate the lender used for qualification. They must do this to have an idea of what your mortgage payment will be. However, interest rates can be much higher or lower than your qualified rate by the time you find a home. If this happens, you could lose your pre-approval. Even a slight swing in the rate could hurt you if your debt ratio is as high as your lender is willing to approve.

Tip: Calculate your debt ratio by dividing your total monthly debts by your gross monthly income. Your total monthly debts should include the new mortgage payment. This means principal, interest, taxes, and insurance. If you are not sure how much you'll be paying in taxes and insurance, ask your realtor for an estimate. You can also ask your lender how close your ratio is to the maximum they allow. This way you know how little changes may affect your approval. For more information on debt ratios, read our article "What Percentage of Income Should Go to Your Mortgage?"

Unfortunately, unless you picked out a home already, you shouldn't lock in your interest rate. Finding a home faster may help your case. Rates are less likely to jump a ton within a few weeks. If you take months, though, you may be in a different situation.

Tip: Before your closing date, your lender will lock in your interest rate. They'll agree to that rate for a certain amount of time, usually between 30 and 90 days. During that time, your rate won't change, no matter what mortgage rates do from that point on. Knowing when you should lock in your rate depends on your situation. Typically, the less time you need for a rate lock, the lower your rate. The longer the rate lock period you need, the riskier it is for the lender. This is because they know the rates can change and they could lose out on giving you a higher rate. Pay attention to the market, predictions about which way rates are going, and consider waiting until you have an actual sales agreement on a home.

Be Prepared for Scrutiny

Consider your pre-approval a snapshot of your financial life on one day. Six months from now, things could look a lot different. That's why pre-approvals are temporary. Many lenders give you 90 days to find a home and use the pre-approval. If you go beyond that date, you start the process again - and your lender must pull your credit and obtain all new income documentation. If you are in the midst of the process in April, you must provide new tax documents. Lenders may ask for the most recent year's tax returns or your W-2s because the tax filing date passed. This could change your pre-approval quite a bit if your income differs on these documents.

Start Shopping for a Home

Once you have the official pre-approval, start shopping for a home. The pre-approval letter helps you narrow down your choices. Knowing how much you can afford keeps you away from houses that are more expensive. This way you can focus on what you can afford. Working with a realtor familiar with the area helps. For more information on what you can afford, visit our article "How Much House Can I Afford?"

Work with the Underwriter

After you choose a home, you must act fast. If you signed a contract, you must meet specific dates. One such date is the date you need financing. This means more than the pre-approval. Sellers/realtors want an approval with very few conditions. For example, you may have an approval with conditions that requires the appraisal report or clear title. This means the underwriter approved you for the loan based on the provided facts. The remaining conditions are separate from your personal factors. You cannot control the value of the home or the status of the title.

The approval with conditions provides sellers with reassurance that you are closer to closing on the purchase. If you don't provide the underwriter with the necessary documents fast enough, you could lose your bid on the home. Sellers want an approval with or without non-personal conditions by a certain date. Many sellers give you 30 days. Your attorney may be able to negotiate an extension for you if you need it, though.

Waiting for Final Approval

Your last step after finding a home is the final approval. Hearing the magical words "clear to close" means you can close on your home. Depending on how well you worked with the underwriter, this can happen fast. The pre-approval process helps iron out the kinks in your application. This way, when you get to underwriting, everything is just a formality. The lender already knows your credit score, debt ratio, and amount of assets. They must verify everything and ensure that you didn't change anything from the original application.

The appraisal and title usually create the longest wait. You cannot control these conditions. The seller must allow access to the home for the appraiser. The title agent must conduct a title search. If the search comes back with unpaid liens or other ownership issues, there could be further delays. Working with a reputable real estate agent and attorney can help speed things along.

A few concerns with the appraisal include:

  • The home's value does not exceed the purchase price
  • There are issues with the home's condition the lender wants fixed
  • The comparable properties are too far away

Sometimes after receiving the appraisal, you must negotiate with the seller again. Oftentimes, lenders require specific repairs because of safety issues. Either the seller must perform the repairs or credit the cost of the repair back to you at the closing. If the home's value does not meet the sales price, you can pay for a second appraisal. You can also appeal the value with the original appraiser.

A few of the most common title issues include:

  • Child support liens
  • Bankruptcy issues
  • Mechanic's liens

The title company must verify the status of any liens prior to closing. The home cannot pass ownership with unsatisfied liens on the property. The liens do not stay with the owners - they pass with the property's ownership. You could get more than you bargained for if you do not have clear title.

The Bottom Line

Securing a pre-approval is one of the most important steps in the home buying process. It lets you know what you can afford. It also helps you speed things along once you find a home. In a hot market, you could lose your bid if you don't act fast enough. Don't secure the pre-approval until you are serious about buying a home, though. Your financial restrictions after the pre-approval are strict. Even the smallest change can affect your approval. Proceed carefully and make sure you compare your options from at least three lenders. This way you know you got the best deal available for you.

Write to Kim P at Follow us on Twitter and Facebook for our latest posts.

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