Getting pre-approved is a great first step for buyers, but there can be a number of hurdles in the process. Here are a few cautionary steps that can be taken to make the experience as smooth and worry-free as possible.
Pre-Approval
Getting pre-approved has many benefits for buyers: it strengthens their buying power, assists in identifying their price range, helps communicate their preparedness to sellers, and, once their offer is accepted, helps to speed up the closing process.
Pre-approval is broken down into two steps: pre-qualification and pre-approval. During pre-qualification, buyers will share their financial information with their bank or lender to understand the approximate loan amount they can expect to qualify for. The pre-approval process is a little more involved, as the lender will conduct a thorough review of the buyerās financial health to give them a more detailed picture of how much they can borrow, estimated monthly costs, and what interest rate they can expect on their loan.
Mistakes to Avoid After Pre-Approval
Being pre-approved doesnāt mean buyers are all set. There are certain mistakes that can throw buyers off course, and in some cases, lead to a denial of financing. Here are five common mistakes that can do just that:
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Large Purchases
Any large purchasesācredit or cashāmade after getting pre-approved can easily cause trouble for buyers. Making a large credit purchase equates to increasing debt, which raises a buyerās debt-to-income ratio. Large cash purchases decrease a buyerās cash-readiness from the time when they were pre-approved. In both scenarios, the lender may call into question a buyerās ability to make their mortgage payments.
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Quitting or Changing Jobs
Knowing that a buyer has a stable source of income is important to lenders. Accordingly, it is best for a buyer to wait until after the home loan process is complete before taking steps to change their employment. Not only could changing jobs potentially put their mortgage pre-approval at risk, but it could also delay their settlement since it takes time to prove a new salary.
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Unpaid Bills
Missing bill payments can be especially harmful to a buyerās candidacy in the time between getting pre-approved and closing on the home. During pre-approval, lenders are using your ability to pay bills on time to help them paint a picture of your finances and itās important to keep that picture consistent.
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New Credit
Opening new credit accounts will likely change a buyerās credit score, which may cause adjustments in their interest rate. Lenders, upon seeing a new line of credit, even a store credit card, may elect to review the buyerās risk of non-payment.
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Paying Off Debt
While most people would think paying off debt is a good thing, if a buyer pays off any significant loans or credit card debt after pre-approval, their lender will want to know where the money came from. The decrease in debt will also have an effect on the buyerās debt-to-income ratio, which may alter their creditworthiness.
The period of time between pre-approval and closing on a home can be a tedious one for buyers. Before making any significant financial decisions, itās helpful for buyers to speak with their lender to get an idea of how it may impact their financial standing. The complexities of this process also highlight the importance of working with an experienced agent.
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