These days, the housing market seriously lacks inventory. Because of this, your real estate agent might tell you that it’s a good idea to get pre-approved for a mortgage loan as you go about searching for a home.
The mortgage pre-approval process is similar to that of actually applying for a mortgage. You give a mortgage lender certain financial information they request, like your income and savings, and it runs a credit check on you to see how risky a borrower you are.
To be clear, mortgage pre-approval isn’t the same as an actual mortgage. But it’s a step in that direction.
Basically, with a pre-approval letter, you get a sense of how much money you’re eligible to borrow for a home based on the information you’ve provided to your lender. Having that letter is important, because it sends sellers the message that you’re a serious buyer whose finances have already been vetted.
You may be wondering how likely you are to turn a mortgage pre-approval into a full-fledged mortgage loan. And the answer is, if your financial situation doesn’t change for the worse, then chances are, your official mortgage will get approved without a hitch. But if your financial picture worsens, you may not end up with that home loan after all.
It’s a matter of risk
Generally, to go from the mortgage pre-approval stage with a lender to an official mortgage, the lender needs to do a deeper dive into your finances. Of course, you also have to find a home you want to buy and make an offer on it. But once that happens, your lender will dig into your finances and make sure it considers you a reliable loan candidate. If your finances don’t change for the worse between the time of your mortgage pre-approval and your actual loan, then getting an actual mortgage should be a snap.
Let’s say that at the time you got pre-approved, you had a credit score of 700, an income of $90,000, and savings worth $150,000. If, a month or so later when you’re ready for an actual mortgage, your credit score is still 700, your income is $90,000, and your savings are at, say, $148,000 because you had to make a car repair, you should be in a good position to have that mortgage go through.
But let’s say a negative financial event occurs during that same window. Let’s say you fail to pay a bill on time and it’s reported to the credit bureaus. If that causes your credit score to fall to 610, it could compromise your mortgage, since lenders typically require a minimum credit score of 620 to qualify for a conventional home loan.
Don’t lose out on your mortgage
If you’re eager to become a homeowner, there are certain steps you can take after getting mortgage pre-approval to make your mortgage official. First, make sure to pay all bills on time. Being delinquent on even a single bill could cause your credit score to plummet.
Next, avoid taking on new debts when you know you’re on the cusp of a mortgage. If your lender sees new loans in your name or much higher credit card balances, it might worry that you’re overextending yourself and deny you your loan.
Along these lines, try to avoid large purchases that aren’t necessary right away. It’s a good thing to be able to show that your savings situation hasn’t changed much.
Again, if you need to take a modest withdrawal for a one-off bill, a lender generally won’t hold that against you. But if you have $150,000 in the bank at the time of your pre-approval, don’t go out and buy yourself a $40,000 boat.
Finally, if possible, don’t switch jobs until your mortgage is official. You can accept a promotion, but a last-minute job change could be problematic.
That said, it’s generally less problematic if you accept a new job of the same nature at a different company. If you’re a CPA, moving from one accounting firm to another won’t necessarily hurt you. And if your income rises, it could help you.
All told, mortgage pre-approval doesn’t guarantee you an actual loan. But as long as your financial situation doesn’t change for the worse, there’s a good chance that if you’re pre-approved, you’ll eventually be able to get an actual mortgage.