Pre-approval is an essential, responsible first step when you’re ready to buy a home. If you’ve been pre-approved and you’re ready to look for homes, you’re on the right track. But it’s easy to mistake a mortgage pre-approval for a guarantee. After all, they spent all that time painstakingly going through your credit score, finances, debts, and assets. Even though pre-approval is a comprehensive, essential first step in buying, it isn’t a done deal. A mortgage can be denied after pre-approval, and is one of the main reasons that property sales fall through. Want to avoid denial after pre-approval? Keep your financial situation consistent, and understand what your pre-approval is based on. This isn’t the time to buy a new car, switch careers, or finance a major purchase. If your finances change, a pre-approved mortgage could be denied when you’re ready to close on a home.
Mortgage pre-approval establishes how much you’ll be able to borrow so you can buy a home. When you choose a lender for pre-approval, they’ll assess your debt-to-income ratio and weigh your income, debts, assets, and credit score to establish how much they’d consider loaning you based on these verified numbers. A pre-approval tells sellers that your finances are in order and that you should be able to secure the money you need to carry through with your offer. When you make an offer, submitting a pre-approval letter along with your offer gives the seller security and assures them that you’re a verified buyer.
Pre-approval also lets you filter out homes beyond your means and gives your agent a clear sense of what you’re ready to buy. With a pre-approval letter in hand, you can search for homes within your budget that suit your needs. Most pre-approval offer letters are valid for 90 days only and require a hard credit check, so you should only apply when you’re ready to buy.
If your homebuying journey isn’t immediate, you might get pre-qualified to get a sense of what you can afford. Pre-qualification is a simple process that establishes what you can afford based on your income, debts, and assets or worth right now. It’s quick and simple, an easy way to get a general sense of what kind of mortgage you might be eligible for. If your pre-qualification establishes that you require a bigger downpayment than you thought, you can take a few years to pay off debts, look for work, or improve your credit score to qualify for a better loan down the road.
Pre-approval goes one step further than qualification. It requires a credit check and verification of your financial standing with a professional lender. It’s based on your verified, in-depth financial standing.
See also: Pre-approval vs. Pre-qualification
Every new homebuyer should know that a pre-approval isn’t a guarantee. Think of pre-approval like a conditional offer. During the pre-approval process a lender establishes the risk of lending you money, runs a mortgage stress test if they’re an A lender, and makes sure you’ll be able to keep up with payments. The pre-approved amount is based on these numbers. If the numbers change, your offer may as well. Changes in your financial situation can result in a denial and cause the lender to withdraw your offer.
Keeping your financial situation consistent is the most important way to make sure your loan application is approved when you’re ready to buy. Many new homeowners also underestimate closing costs which can include legal fees, renovation costs, appraisals, and inspections. So it’s a good time to keep a consistent budget and save where you can. When you were pre-approved, the lender used your debt-to-income ratio to establish your bottom line. This means weighing your debts against your monthly income and assets. Your mortgage approval is based on your financial standing at the time of approval.
New debts can change your financial situation and the kind of mortgage you’re eligible for. Don’t make any big purchases or take on new debts after pre-approval. If you’re looking to make a big purchase that might need financing, wait until well after you’ve closed on your home and paid all closing costs.
Make any debt payments on time to keep your credit score consistent. If you miss credit card payments or get behind or bills after pre-approval, a lower credit score could result in a denial on your mortgage. Keep your credit score up by paying off debts where possible and paying on time.
Your income and employment were part of why your mortgage was pre-approved. This isn’t the time to consider a new career direction or to quit accounting to pursue your painting hobby. Layoffs or changes in employment income can alter your personal finances. Any change to the consistent income or assets considered during the pre-approval process could affect the offer you were given, so do what you can to keep your income consistent.
If you were denied your mortgage after pre-approval, know that you’re not alone and you have options. Many homebuyers face costs they didn’t anticipate, or experienced unexpected layoffs and financial challenges. Here’s what you can do to reassess and expand your options.
We’re here to help you navigate home buying. Houseful offers a tailored home search experience based on the features and details you care about most, so you can find a home that fits.
This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.
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