No big changes after mortgage pre approval
A pre-approval is granted based on your financial, employment, credit and life circumstances at the exact moment in time you asked. It stands to reason that if something significant changes between then and the time you actually make an offer to purchase, your approval could very well fly out the window!
But we still see this sort of thing all the time. I guess no one is telling prospective home buyers this hugely important fact.
Edib and Jana are planning to move up to a bigger house this Spring. When they went to their bank last November to understand their options, Andrea had a solid full time office job making $43,000 per year. Their bank issued a pre-approval certificate good for 180 days.
During the holidays, they decided Andrea should cut back on her work hours to spend more time with their teenage children. She found a great new part time job five minutes from their home and she resigned her full time job.
Last week they braved the extreme cold to make an offer on a larger house in their neighborhood. The offer was accepted, but when they went back to the bank to formalize their mortgage, they found out they no longer qualify for a mortgage.
They had assumed the certificate they got last Fall was all they needed, but these are never guarantees – just a declaration you should be okay if nothing changes in the meantime. (And even if there are no changes, the property itself has to pass muster)
They came to me looking for a miracle, but there are no miracles here. If they want to buy a larger home, Andrea will need to restore her employment and income to roughly what it was when the bank pre-approved them.
Similarly, a family of three (parents plus adult daughter) decided last October to buy a home and were pre-approved by their bank. The daughter went back to school full time in January and was surprised to learn their pre-approval was no longer valid. A pre-approval is never binding on the lender – EVER!
In another example, one of our clients last year quit her full time consulting job to become a self employed contractor AFTER her mortgage request was approved. She had waived all conditions and was committed to buying a new home in King City, and assumed that once she was approved it would be plain sailing.
Not the case. Mortgage lenders often wait to confirm employment in the last week prior to closing. This turned out to be a disaster – she was not able to close and now is being sued by the seller.
Other times we meet buyers who take out a new car loan or lease after they are pre-approved. This changes their Total Debt Service Ratio (TDSR), and may make the difference between remaining approved or being disqualified.
Last summer a couple we pre-qualified came back with an offer to purchase in the Fall. We always have to submit a fresh copy of the credit report with an application (fresh means less than 30 days old) In this case, they had each recently binged on applying for new credit with several credit card issuers. This raises red flags.
Upon further discussion, it turns out their expected gifted down payment had fallen through, so they decided to apply for credit and use borrowed money to fund the down payment. This does not spell an automatic decline – but in their case it did, since the monthly payments on their new credit cards killed their TDSR.
If you are planning to buy a new home, and you are considering making changes to your income, employment or financial circumstances, do not assume that because you were pre approved previously that you are good to go. You’re probably not.
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