A pre-approval is often provided to home buyers after review of their application, income, and credit. It can offer a rate hold and a comfort level of what amount of mortgage you would qualify for based on your credit worthiness and borrowing capacity.
But a pre-approval is not a guarantee that your mortgage will be approved. The lender also needs to consider the property itself, as well as review all the documentation before the pre-approval can turn into an approval. There is often a second layer required for approval if you are putting less than a 20% down payment and requiring an insured mortgage. Insurers do not see your application during the pre-approval process.
An approval is issued after the lender and the insurer (if required) have done a full assessment of both the borrower and review of the property. Here is a look at some of the reasons your pre-approval may not turn into an approval.
Common Reasons a Property May Not Be Approved
Property Condition: An appraisal or inspection can raise concerns about the condition of a property. Foundation issues, water damage or state of repair the property may present can all be concerns to a lender or insurer. Properties listed “as is” should raise concerns to potential buyers that this property may not get the financing you expect. Things like asbestos and wiring type could also raise concerns and result in a lender not wanting to risk financing the property.
Home Value: The amount you offer and bid on a property may not be the same as the amount the property appraises for. If this happens buyers need to be prepared that financing will be based on the lower of the offer or appraised value, meaning you will need additional resources above your down payment the offset any difference.
Property Types and Locations: Unique properties that may have limited marketability could be a concern to a lender that could impact an approval. Log homes, rural properties with acreage and outbuildings, previous grow-ops, hobby farms, leased land are just a few examples that could raise challenges of obtaining an approval. Properties that are too far from your place of employment or properties that are near industrial businesses or gas stations could also impact a lender approving the property.
Condos: Some condo buildings are flagged by insurers and they will not lend on them for reasons like high maintenance fees or information provided in the condo status certificates that indicate significant assessments of repair or upgrading required to the condos. Micro condos or those without a separate bedroom and less than 500 square feet could also be a concern for some lenders.
Common Reasons a Borrower May Not Be Approved
A change in employment: Changing jobs midway through the process could impact the approval, probationary periods or going from employed to self-employed are material changes that can impact a lender or insurers approval
New Credit or Increased Credit: Any major purchases that add monthly payment obligations will impact your borrowing capacity. Buying a new car, furniture or appliances should wait until after a purchase closes.
Changes to Credit: Forgetting to pay a bill, having a collection pop up or simply utilizing more of your available credit could cause a drop in your credit score impacting your ability to qualify.
Down Payment: Making any changes to the source of the down payment can impact your approval. A documented history is required for all sources of down payment.
Risk of Condition Free Offers
In today’s hot seller’s market, where demand outweighs supply, it is not uncommon to see offers to purchase written with no conditions and above asking price.
The condition of financing that was once the norm in most markets not that long ago, with 5 to 10 days to obtain financing, allowing for time to obtain that approval from both lenders and insurers fully reviewing and approving both the borrower and the property.
Home buyers today are shopping with their pre-approvals in hand, hoping to win their bid in multiple offer situations. While there is some security in knowing that the information has been vetted and a pre-approval issued, buyers, especially first time buyers, need to understand these are not approvals and the risks that could compromise the ability to obtain financing.
Making an Informed Decision
When you are preparing to make an offer on a specific property with your Realtor it is important to let your Mortgage Agent know the details of the property and review the overall strength of the pre-approval and identify if anything might result in the purchase or property not being approved or approved for a less than the offered amount.
An experienced Mortgage Agent can advise if there are potential risks or concerns of not obtaining approval allowing you to make an informed decision to move forward with your offer to purchase, especially if you are considering an offer with no conditions.
In the end, it is entirely up to the buyer to make the decision of going in firm on an offer to purchase or not.Understanding your preapproval is an important part of the purchasing process, and we are here to help you prepare. Reach out to our team to get the process started with confidence!