Is a Mortgage That’s Been Pre-Approved Guaranteed to Fund?

Miniature home with key, on top of 100 dollar billsIn the real estate lending world, there is typically something called a “Pre-Approval” letter or a “Pre-Qualification” letter. The purpose of these letters is to communicate to the parties in the transaction that the borrower (whoever is trying to get financing), based on preliminary information supplied to the lender, will successfully obtain funding of the mortgage for which the borrower has applied.

In some lending markets, there is no difference between an approval letter and a qualification letter and they are considered to be identical animals with different names. However, depending on the real estate lending market in question, there can be a meaningful distinction between the two. For the sake of discussion, we’ll just ignore the distinctions and assume that we are in one of the markets that operates using only a “pre-approval letter.”

What makes things interesting is that there is a time lag between when the pre-approval letter was issued and when the loan hopefully funds. A lot can happen between these two points in time that would negatively affect the risk complexion of the borrower and other factors that would cause the lender to back out of the transaction. Thus, the pre-approval letter is not a guarantee that the desired loan will fund.

As noted here, a pre-approval is conditioned upon the assumption that your financial circumstances will remain the same between the time you apply and the time you close your loan. If you lose your job, if you take on other significant credit, or if you default on another loan, you may be denied a mortgage despite your pre-approval.

Here are examples of some specific ways to avoid losing your mortgage after pre-approval, as explained by Yahoo:

  • Watch your spending
  • Don't Borrow From Your Credit Card for the Escrow Deposit
  • Don't Change Jobs & Maybe Even Stall a Promotion
  • Avoid Getting Another Loan
  • Stay Married

As already noted, getting pre-approved for a mortgage is a smart step for any homebuyer. When you apply for pre-approval, the bank checks your credit and asks for all your financial documents. The pre-approval letter gives you confidence that the bank wants to lend to you, and it will also tell you the limit on what you can borrow. It sets a helpful parameter and expectation for you as you search for a new home. However, a pre-approval letter does not guarantee that you will end up with a mortgage from that lender, who may ultimately decide to deny your loan request.

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