A mortgage pre-approval is a document from a lender stating that a prospective buyer may have the income, assets and credit to carry the mortgage required to purchase a house of some assumed value. Some of its uses are briefly described here:
- The initial review of your financial profile indicates the maximum loan amount a lender should offer, the loan programs that are open to you and the interest rates you will be offered for a specific period of time.
- It lessens the chance of you being disappointed if final mortgage approval cannot be obtained for a home you have set your heart on.
- It signals to the home-seller that you have the financial means to complete a purchase and should therefore be taken seriously.
- A seller may accept a lower purchase price from a buyer with a pre-approval.
Although pre-approval is a good indication that the lender is willing to take on your mortgage needs, it is not a 100% guarantee that a loan will be granted. Even with a pre-approval in your hand, the mortgage lender may still perform a more rigorous inspection of your assets, income, credit, job history and other data after you have selected a home and before funding in order to decide whether to issue to you a firm loan commitment. For example, when a pre-approval is granted, the property value or purchase price likely has not been determined as there is not then a signed purchase agreement. The interest rate, which determines a borrower’s mortgage-carrying capacity, also may not be known such that the pre-approval is not binding on the lender.
Once you have a firm loan commitment, all conditions for funding on the day of closing the purchase transaction must still be fulfilled and the information upon which the decision to grant the loan must not have changed in a way that is negatively perceived by the lender.
Download the PDF: Concepts Newsletter – Summer 2010