Obtaining a pre-approval for a mortgage cannot keep your house out of a sinkhole in the literal sense.  However, a pre-approval is a great way to speed past the sinkholes found in the standard mortgage process. Having the ability to move quickly allows homebuyers the opportunity to move into the house they want with fewer headaches and possible pitfalls throughout the process.

What does pre-approval mean?

New mortgage rules from the Consumer Financial Protection Bureau (“CFPB”) require the lender to make a reasonable, good faith determination of the ability of the borrower(s) to repay the loan. The CFPB’s Ability-To-Repay Rule and Qualified Mortgage standard requires that certain criteria be reviewed, verified and documented to this ability to repay. During the pre-approval process, a mortgage loan officer examines a set of financial documents, applies the requirements of the ATR and QM requirements to ensure the home shoppers’ ability to repay and clears them for a loan up to a certain amount. It is not a final, binding loan agreement – that requires a broader underwriting and appraisal process. However, it does give home shoppers the best indication of the highest amount that they will be able to finance and any obstacles that need to be addressed before they are under contract to purchase a new home. Once cleared, the mortgage lender prepares a written document verifying the pre-approval, and the home shoppers can present that document to their real estate agent to demonstrate their ability to finance a purchase. This document is often shared with the listing agent and seller to add strength and credibility to their purchase offer.

Pre-Approval Advantages

1)      Suppose you are competing with another home shopper for your dream home. You have secured pre-approval. The other bidder has not. In this situation, the sellers know that you are good for the money. They do not have the same assurance about the other bidder. This makes the sellers more likely to favor your offer, rather than playing wait-and-see.

2)      Suppose you find the perfect home. You apply for a loan, only to be rejected. This leads to a sharp feeling of surprise and disappointment. It turns into an unpleasant conversation with a loved one, who raised his or her hopes too high. You also wasted time, which can be valuable during a home search. Pre-approval sets realistic expectations while also preventing such a rude awakening.

With the ATR and QM requirements now in place, the days of the pre-qualification process are numbered. The pre-qualification is an assurance from the lender that you are “qualified and eligible” for the loan program and loan amount you desire, but it does not include the verification and documentation needed to support the information provided on an application. Therefore, the pre-qualification process does not comply with the requirements of the reasonable, good faith determination of the ability to repay.

If you would like to begin the pre-approval process, contact a Guardian Mortgage loan officer.