Getting Pre-approved for a Mortgage

Is getting pre-approved for a mortgage the same as getting pre-qualified?

The more you deal with people in banking and real estate, the more terms you will come across that are confusing. It’s not a lesson in Latin all over again – because talking to a real estate person is not like talking to a lawyer who enjoys throwing his esoteric bag of Latin phrases around. There are days, however, when it certainly feels like re-learning Latin – even if you’re just interested in buying a house.

Abundans cautela non nocet. This is Latin for ‘abundant caution does no harm’ (literal), or in layman’s terms, ‘one can never be too careful’. There’s a writing rule that says writers should avoid the use of foreign phrases and words because it would look like they were showing off to their readers. We’ve been good at following that rule, but we’re making an exception this time, because…well…buying a house requires physical and mental energies of the herculean kind, and if we don’t pay attention to contractual documents, we could get lost in fancy terminology which, if we don’t clarify right from the start, will come back to haunt us later. So when buying a house, abundans cautela non nocet!

As a preventive measure, know the difference between getting pre-approved for a mortgage and getting pre-qualified. These two might appear synonymous to you, but for a lender or banker, each involves a different level.

Pre-qualification

Let’s take pre-qualification first. You meet with a lender and tell him you’re interested in buying a house but that your purchase is subject to the weather. We have no idea how people decide to buy a house because of the weather, but that’s just our way of saying that if you’re not serious about buying a house – since you don’t know why, where, when and how to buy a house, then you could go for a pre-qualification instead of a pre-approval.

In other words, don’t waste your banker’s time. A pre-qualification, therefore, is that part of very early negotiations, which does NOT include your lender looking into your credit report; nor require him to scrutinize your financial capabilities to buy a home. The lender merely gave your income and expenses a cursory glance and then worked out a rough estimate. Nothing more. It’s just to give you an idea of the price you can afford.

At this stage, you’re really just “shooting the breeze” with your lender. Will he lend me, will he not? And on his part, he’s thinking “is this guy serious or is he only killing time before his dental appointment?”

Call it lack of intent. Out of professional courtesy, however, your lender will answer your questions anyway about the home buying process. He’ll play along, but he’s hoping – if you’re a good risk – that you’ll eventually take out a mortgage with him.

Pre-Approval

When you are in the process of getting pre-approved for a mortgage, you’ve just entered a more serious phase of the whole house-buying process. The lender takes out his magnifying loop and examines your credit standing, your income (gross and net), debts and expenses, and based on what he finds, decides if you qualify for a loan. Your financial profile will clue the lender into the maximum loan amount he can offer, the packages that are open to you, and the mechanisms for each of the packages. He will also talk about interest rates – the pros and cons of going open and variable, or fixed.

Getting pre-approved for a mortgage is the ammunition you take with you when you’re ready to go shopping for property. You’re telling builders and real estate agents that you have buying power so that they take you more seriously. Remember that savvy real estate agents can smell a serious buyer from a non-serious buyer a mile away. When you’re pre-approved for a mortgage, they would be more inclined to spend time with you – to seduce you into buying.

Getting Pre-Approved for a Mortgage: Steps

These steps are general guidelines only; lending institutions may have slightly varying procedures. The best thing is to check with your lender.

Step 1: Complete the mortgage application

You provide personal information: address, date of birth, employment history, salary, other income, debts, assets and liabilities, and amount of downpayment. If you have a co-signer or guarantor, indicate this on the application form. Most banks make it possible for you to complete your application online as well.

Step 2: Lender determination of loan amount and interest rate lock-in

After making an assessment of the information you provide on the mortgage application, your lender will advise how much his bank is willing to lend you and the interest rates and amortization terms that are available. If he says he will lend you $160,000.00 at 6.8% interest for five years, he will lock in those terms for as long as 90-120 days until you’re ready. Since your interest rate has been locked in for that period, your application will not be affected by a rise in the interest rates during that 90-120 day window. The incentive here is that should the rates go down to say 6.2%, your lender will adjust your rate to 6.2%. To lock in a rate is to protect you from rising interest rates, but you get to enjoy a lower percentage interest rate if lending rates fall.

Step 3: Renewal of pre-approval

If after 90 or 120 days you still have not found a house that meets your needs, inform your lender that you wish to renew your pre-approval. He may offer you the same terms, although this is not guaranteed. If the rates went up 30 days ago, he may be obliged to increase the interest on your mortgage loan. This is at the bank’s discretion.

Step 4: Verification of information and property

Getting pre-approved for a mortgage does not equate with getting approved. Your banker still needs to check the information you supplied on the information, and he must assess the property you’re interested in. This is an essential part of the application process. Your lender has to be convinced of the integrity of the information, and must be assured that the property is viable. This is a contingency he plans for in case you default and the bank has no choice but to foreclose. The bank will protect their interests by ensuring that the property they are foreclosing can be re-sold to the market.

Step 5: Approval

You’re now leaving the pre-approval phase and moving forward. When you’ve chosen the property and your lender has verified all information and is satisfied with the property, he can now officially approve you for a mortgage loan. He will issue a commitment letter which serves as the confirmation of the amount and the interest rate. It will also list any additional documents the bank will need from you before the funds are committed and released. Your approval, though very close, is dependent on the other documents you promise to submit. One type of information is proof of the source of your down payment. Your lender wants to know if the down payment will come from borrowed funds because it adds to your debt burden. If it’s coming from your own funds or is a gift, that is acceptable. He verifies the property by requesting an appraiser to carry out an inspection (some banks will pay this for this, others will ask that you pay the appraiser’s fees) or look into a database of property listings.

That, in a nutshell, is the process of getting pre-approved for a mortgage. If you think this was a tough exercise, it’s just the beginning, to be quite honest. Moving in and converting your house into a home are altogether different scenarios, forcing you to change gears and…spend more!

At this point, however, you deserve a hearty congratulations because not everyone can go past the pre-qualification or pre-approval stages. It’s like the bank is saying to you, “you’re a good risk.” But be vigilant with those mortgage documents…

Ignorantia juris non excusat (just because you weren’t aware doesn’t mean you’re not liable)!