Mortgage Preapproval doesn’t Guarantee Final Approval

In today’s unconventional housing market, where inventory is low, competition is fierce and bidding wars are common, obtaining a mortgage preapproval has never been more important. In the face of multiple offers and fast-paced decisions, having a preapproval in hand provides better leverage with sellers, ensuring strong contention and a distinct advantage over non-approved buyers. 

Obtaining a preapproval is highly recommended before you even begin house hunting so you understand what you can comfortably afford to spend on a property. During the process, your lender will undertake a thorough and comprehensive assessment of your finances and creditworthiness to determine whether you meet the requirements to secure financing. If you’re preapproved, you’ll receive documentation verifying that you have the financial means to make an Offer to Purchase. This represents a conditional commitment from your lender to grant you the mortgage you seek but in no uncertain terms does it represent a final mortgage approval. That’s why it’s essential to always include a condition of finance in your Offer to Purchase even if you’ve been preapproved for a specific mortgage amount.

The conditions of a preapproval will typically be valid for 90-120 days. During this period, it’s important not to make any significant changes to your current situation. When it’s time to draw up the Offer to Purchase, your lender will want to verify that you still meet the qualification criteria as well as assess the property’s value and suitability. If there are changes that could possibly derail the process, you could be denied a mortgage despite having been preapproved. 

While there are some changes such as government-imposed modifications to lender requirements or qualification guidelines that are naturally beyond your control, by following a few simple steps, you’ll increase the likelihood of achieving the all-important green light for your mortgage. 

Maintain a good credit score

Your credit score is one of the most important factors in obtaining a mortgage approval so avoid situations that could alter it negatively. If your credit rating drops, your risk level in the eyes of your lender increases, which means you may no longer qualify at the amount for which you were preapproved. It’s important to demonstrate a consistent pattern of paying your bills on time and managing your debt responsibly. Exercising wise financial decisions will ensure your credit remains in good standing.

Refrain from incurring higher debt 

Rising debt is a significant red flag for lenders and will adversely affect your debt-to-income ratio (DTI), a key determinant in the mortgage financing qualification process. A high DTI ratio implies instability and potential issues with loan repayment so you want to keep it low. Avoid taking on new debt, even a small amount, such as a line of credit, personal loan or additional credit card, and be sure not to accrue a higher balance on your existing cards or lease/finance a vehicle. An increase to your debt level, no matter how insignificant, will almost certainly jeopardize your chances of approval.

Keep employment and income consistent 

If possible, avoid making any changes to your employment status once you’ve been preapproved. Most lenders will require you to have at least two years of consistent income and stable employment so, if you can, hold off on any career decisions until after the deal closes. There are some exceptions where a similar career with similar income will likely not pose a problem to your application, but a brand new field with less stable income will not bode well. Also, if you lose your job or your wages are reduced, it may be wise to reconsider buying a home until steady employment resumes. 

Ensure personal finances remain stable 

Lenders will also want to see a consistent balance in your personal accounts. Avoid withdrawing any significant amount of money from your savings account, writing any large cheques or selling any assets if they were used in the preapproval process. Keep monthly payments, including property taxes and utilities current and avoid deferring loan payments of any kind. And, don’t forget to have enough put aside for your closing expenses, which can be significant (typically 3-5% of your purchase price).

Be prepared for appraisal disparity 

In a typical housing market, a property’s appraisal should be closely aligned with its purchase price. Lately, however, with buyers paying well over asking, the two have been out of balance resulting in a distinct gap. Lenders use a property’s valuation to measure the amount for which buyers qualify relative to the purchase price. If there’s a large discrepancy, you may be required to take out a more sizeable loan. Your lender will then need to re-evaluate whether you have the financial capacity to make up the difference before granting an approval. 

Have questions about mortgage preapproval or final approval? Answers are a call or email away!