You’ve found your dream home: the perfect neighborhood, great schools, a beautiful kitchen, spacious rooms, ideal square footage. When you go to put in an offer, you realize that it’s not only your dream home but someone else’s as well. The seller now has two offers.
This happens more often than you’d think. It’s why realtors won’t jump to show you houses until you can present a pre-approval letter. If you want to be taken seriously, you need to get pre-approved.
Here’s a quick guide to the difference between approval and pre-approval, and why it matters to you:
One word: verification. Pre-approvals are an estimate, not a promise. A pre-approval is a non-binding statement saying, based on a cursory review of your unverified financial status, that you are eligible for a loan up to a certain amount. It is based on a credit check and (again unverified) claims of income and debt. The approval is the process of obtaining a specific loan on a specific property for a specific amount. These are subject to review of a complete loan application; identification, appraisal, and inspection of the property being purchased; preliminary title report, and supporting documentation.
A pre-approval will almost always contain language to the effect of:
“This letter is conditional on no material changes to your financial condition or credit worthiness. “To get approval, you’ll have to verify your income (via tax returns, pay stubs, etc.), employment history (with T4 or a letter from your employer), assets, credit score, and the value and condition of the property being purchased.
Nothing is gained from misstating your income (or debt). A tangled web will need to be unwoven before the approval process is complete, so an overestimation of income (income that you can’t later verify with documentation) will result in a pre-approval that isn’t representative of the size or value of home you can actually afford.
No, but if you’ve provided accurate information and the lender does a good job scrutinizing your credit history, income, and debt during the pre-approval process, it’s likely that you’ll be qualified for a loan that’s within range of the pre-approval amount.
Sometimes your actual loan is less than what you were anticipating. In these instances, several things can happen:
Pre-approvals are a rather simple, non-invasive process that, if done honestly, can save you time and avoid disappointment. Shopping for a new home should be a fun and exciting experience. Make it so by getting the preliminary work done ahead of time.
If you have any questions, don’t hesitate to contact us. We’re here to help.