When a Pre-Approval Is Not a Pre-Approval

As a good rule of thumb, it’s always in a prospective buyer’s best interest to get a pre-approval for a mortgage when making an offer on a new home, but it’s especially important in a tight, competitive market. Why? In essence, it gives sellers relative assurance that you’re financially capable of purchasing the property they’re selling—something that a verbal commitment just can’t do.

Getting that pre-approval means, providing your lender with an array of documents that speak to your financial wherewithal. At a minimum, you’ll need to document your income, savings, and debt for the last two years, and in some cases, the lender will want that information for the past five years. The lender then verifies your credit history to confirm your income, debt, and assets, as well as your employment. You then complete a blizzard of disclosures, all compliments of the new regulatory regime we live in, that fully expose your financial and personal life. In the end, nothing is left private—it’s all out in the open. The upside of becoming fully exposed, however, is that once you’ve received that coveted pre-approval, you’ve been deemed a creditworthy individual who can ascertain their dream property—or so you think.

Before you get too jubilant, always read the fine print. Even though you’ve been given the pre-approval, you’re not guaranteed to get a mortgage. Pre-approval is the step before approval. And while it certainly sets the stage, the pre-approval doesn’t guarantee that a lender will offer you a loan. So what happens if you recently put an offer on your dream home because you thought the lender had everything they needed to offer you a mortgage? Now, you have 30 days to get the mortgage commitment. And that means the lender will start asking questions that seem redundant after already going through the pre-approval process. Individuals that own a business and deal mostly in cash transactions are likely to feel this way. Why?

1.            Business owners must explain the nature of their business and why they deal in cash transactions.

2.            Business owners need to explain the cash deposits, why they didn’t deposit these funds in the business account, and why they’re dealing with cash deposits.

While answering these types of questions might seem overly tedious and invasive, don’t be dismissive about responding. That’s because a lender might not grant you a mortgage commitment if you don’t explain the rationale to those questions and to the lender’s satisfaction. Your answers could also affect the type of mortgage product you’re offered. Once a seller accepts your offer, the pressure is on, and time starts ticking to secure a loan before the mortgage contingency timeframe in the contract expires and you lose your dream home. There’s even more pressure involved if you waive the mortgage contingency and end up at risk of losing your deposit.

At this juncture, you need all of your allies going to battle for you: real estate salesperson, mortgage broker, attorney, and accountant. Each will provide you with a strategy and help you overcome each hurdle on the road to home ownership. At this stage, you can’t assume that the lender will provide you with a mortgage commitment that exactly matches the pre-approval because you may not meet their internal underwriting guidelines (a.k.a. policies and procedures). As a result, you need to cast your net and speak with other mortgage brokers, ideally those who have relationships with different lenders who have more experience lending to borrowers like you. By working with a mortgage broker, you get the best product and rate because the broker has knowledge and access to many programs from many lending institutions.

Institutions establish lender guidelines and requirements to manage risk, but they do so to balance the amount of loans they keep on and off their balance sheets. Lenders who sell their loans to a government agency such as Fannie Mae or Freddie Mac or to private institutions must ensure that the loans meet these institutions’ guidelines and requirements.

So the moral of the story is: just because you have received a pre-approval doesn’t guarantee a mortgage commitment. So you must be prepared to provide a seemingly never-ending supply of supporting documents to bridge the gap between pre-approval and final mortgage commitment.