Like many things in life, buying a home is a process, and there are necessary steps that must be taken. The first of these is getting pre-approved for a mortgage. In fact, it's an important tool for all parties involved. Lenders use it as an opportunity to learn more about their potential borrower's income level and credit score. Borrowers like it because it allows them to calculate their potential mortgage payment.
Sellers and real estate agents use a pre-approval as proof that a buyer can afford a mortgage and bid on a property. But, pre-approvals are not written in stone! Unfortunately, many prospective buyers are not aware of this! That leads to disappointment when they are denied for a mortgage, or when their monthly payments turn out to be much higher than they had anticipated. So, what do you need to know about pre-approvals?
Originally, pre-approvals were done by real estate agents, and credit checks were not part of the process. It was basically a way for realtors to determine if a prospective buyer could afford the home they were interested in purchasing. But as the mortgage industry grew, lenders began hiring loan officers to handle the pre-approvals. Real estate agents were on board with this because it gave them more time to do what they do best -- sell homes. As mortgage backed securities gained popularity on Wall Street, the variety of mortgages available increased as well. That meant that pre-approval became almost automatic -- because regardless of a borrower's financial scenario, credit score, income level, etc., there was a mortgage out there that he qualified for. Then came the housing market's collapse in 2008. Defaults, foreclosures, loan buy backs, and short sales changed the mortgage pre-approval and approval process forever! Today, lenders are much more selective in approving prospective buyers for home loans. In the past, pay stubs and W2s were sufficient for proof of employment and income level, but now lenders want to see tax returns as well. That allows them to track unreimbursed employee expense write-offs. Proof of origin for deposits into asset accounts are also now required. If a borrower can't provide all of the necessary paperwork, those assets are removed when a lender is doing calculations -- even if the money is already in the borrower's account! But, all of this double and triple checking comes into play during the actual mortgage approval, and not during the pre-approval stage. In fact, a preliminary mortgage approval is usually done over the phone, and requires little paperwork. The lender asks the prospective borrower about their income level, but rarely requests documentation to support those claims. Why? Because most borrowers are apprehensive to send those documents at such an early stage of the game, and lenders know that! Until a borrower is ready to choose a lender, all they are searching for is a pre-approval. For a pre-approval, all lenders take into consideration is usually an income level and a quick check of the borrower's credit report. If the borrower's income level seems high enough to make the payments on a mortgage for the home they want to purchase, and their credit is clean, a lender is likely to grant a preliminary mortgage approval. Later in the process -- when a lender knows that the borrower actually wants to take out a loan from their financial institution -- that's when lenders start to ask the hard questions and want proof for every answer given. That's why sometimes your pre-approval and your actual mortgage approval can be very different. So, while preliminary mortgage approvals are an essential step in the process of home ownership, you should also take them for what they really are -- the first step in the process!
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