Real Estate Blog for Communities across the U.S.

Common Mistakes People Make with Pre-Approval Letters

I called a Lender and just completed a quick conversation explaining my desire to get pre-approved. I provided the lender with all the documentation they requested (a list of documentation required for pre-approval can be found here.) They asked about my income, ran my credit report, and we discussed how much money I would put down on a new home. I had a Pre-Approval Letter in my inbox in 30 minutes!

I have completed the necessary steps to be ready to close quickly on a home when I get an offer accepted or have I?

Not one industry has experienced more change and increased regulation than Home Loans/Mortgages in the last 5 years, thus resulting in increased verification of all aspects of a borrowerís profile. Most borrowers are not reminded of this until they begin the formal application process.

Here are a few examples of situations that cause additional work or explanation after the pre-approval has been obtained.

Job Change

  • Borrowers View:
    • Not a big deal as I have maintained consistent employment without any substantial gab between employers.
    • No worries as my income will be or should be the same or better than what it was at my old job.
  • Lenders View:
    • Offer letter from NEW employer will be needed to detail how income is structured such as salary or hourly wages. Clearly defining what is a base rate of pay and what will be incentive pay ñ either bonus opportunity or overtime opportunity.
    • One or possibly two paystubs will be required prior to closing to verify the income matches the offer letter.
    • Debt to Income Ratios must be reviewed to verify they meet guidelines.
    • Additional written verification of employment may be needed to document file.

Buying a new car

  • Borrowers View:
    • I have no concerns because the new car payment will be very similar if not less than the old car payment.
  • Lenders View:
    • Must be able to see the new car loan on the credit report. Depending on when the new financing takes place borrower may have to supply the Lender with loan documents to have the credit bureaus add the information to the credit report.
    • Verify old car loan has been satisfied and no longer a monthly obligation. Again, this may require a letter from the finance company indicating $0 balance and then the Lender can have the credit report updated.
    • Debt to Income ratios must be reviewed to verify they meet guidelines.

Interest Rates rise

  • Borrowers View:
    • I spoke to the Lender so my rate is set.
    • Rates may change but I am already Pre-Approved so no concerns.
  • Lenders View:
    • Rates have jumped over 1 percent since May of this year; this has the ability to change the debt to income ratio substantially.
    • Debt to income ratios are a ìblack and whiteî item that can take a loan from Approved to Denied. If the debt ratio hits 45% on certain loan programs, the borrower will have to show more income or pay off debt to get the loan back to ìapprovedî status.
    • See what First Commerce Financial predicts mortgage rates will do for the rest of 2013.

Switching Mortgage Lenders

  • Borrowers View:
    • No concern from the borrower as they believe the pre-approval is generic for the industry and not specific to any one Lender.
  • Lenders View:
    • A Credit Report may be specific to one Lender. Changing Lenders requires a new credit report to be pulled and new credit scores will be factored inÖ.not the credit report initially completed.
    • If credit score changes and drops one point below thresholds, options and rates may be different.
    • Additional credit inquiries/debt will need to be justified and still meet guidelines.
    • For more information, check out What Every American Homebuyer Should Ask Their Lender.

Late Payments

  • Borrowers View:
    • May or may not be a big deal as my prior history is solid.
  • Lenders View:
    • Credit score implications may change loan options available.
    • Late payments may now illustrate a trend, and additional letters of explanation are needed to document the loan file.

The most important thing you can do to avoid problems during the house hunt is keep frequent communication with your Mortgage Lender and your Realtor. If they are all in the loop about where you stand and stay ahead of any changes to your qualifications as a borrower, you can eliminate a lot of the frustration that could arise.

Author Bio: Kirk Chivas is a licensed Loan Officer and co-owner of First Commerce Financial, a mortgage brokerage based in Wixom, Michigan. With over 17 years of experience, Kirk has committed to providing Michigan residents with accurate and honest mortgage advice. If you have any questions about your current or future mortgage needs, please feel free to ask Kirk a question over on his website

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