January 20, 2009
Your Pre Approval isn’t Worth the Paper it is Written on
How many times have I heard the sweet refrain from a client, “but I have a pre approval” upon learning that their lending institution is not processing their mortgage request as easily or as quickly as they had expected. In certain cases their approval does not come at all. How can this be, and why do people run to be pre approved?
Let us dissect the word pre approval. It means prior to being approved. The document that one gets from the bank basically says that all things being equal they will give you a mortgage for the said interest rate guaranteed for 60 or 90 days, (sometimes up to six months). The letter also states that based on the information given to date they will be willing to loan the client up to a certain total. This sounds great! Armed with this piece of paper the client begins looking for a house that that would fit his or her budget. In a perfect world this would be a fait accompli. Alas we don’t live in a perfect world.
Once you have found the house that you are looking for, you basically have to reapply for your mortgage with all the additional info that the bank requires. You have to provide the bank with the details of the property such as the listing which should provide all pertinent information such as location, taxes, sq footage, heating costs etc. The bank will then recalculate to verify that you can still afford the property based on your expenses such as heating and taxes.
No mortgage loan application is complete without an evaluation of the property to assure the bank that the LTV (Loan to Value) ratio is within the conventional guidelines required for such a loan. This is in fact the last leg of the approval process and will only be done once all your other documents have been scrutinized and approved.
Documents indicating the source of your down payment, your proof of employment, and of course your tax returns are some of the papers the lender will require.
Why do people actually run to get a pre approval? They are looking for their comfort zone in terms of what they can afford and of course they want to lock in an interest rate as protection in case rates are on the rise. This can be a good strategy if in fact you find a house within the allotted rate protection window.
Where people run into problems is that they believe the amount of the loan preapproved by the bank is written in stone and they will feel comfortable submitting a promise to purchase for the full allowable amount. This is not a good strategy because you should never borrow to your max, leaving you no breathing room should any unforeseen expenses arise.
Q: Should you after all is said and done get a preapproval?
A: Sure, provided that you realize, what it in fact is, and you are honest with yourself as to what you can truly afford.