Today, the real estate market is competitive and homebuyers need all the help they can get to secure their home at the right price. Once you find the right property, presenting a compelling offer might be the difference in getting your dream home.
However, it is a common misconception that a ‘mortgage pre-approval’ will guarantee an approved mortgage. This is hardly the case. In the current overly aggressive seller’s market, you might need extra to help make your offer stand out. And this is where ‘approval’ also known as pre-underwriting comes in.
Differences Between Approval and Pre-Approval
A pre-approval is simply a non-binding statement that estimates your eligibility for a mortgage loan. Data used to make pre-approvals is often unverified and strict sellers might be sceptic about accepting pre-approvals.
Approval is the verified process of obtaining a specific loan on any property at a given price. Approvals require a complete loan application, identification, appraisal, and inspection of the property on sale.
Even with a pre-approval, buyers still need approvals before doing business with home sellers. Mortgage pre-approvals are just reassurances that you can get a loan. However, approvals take this promise a step further. With approval, it’s a guarantee you’ll get the loan.
Risks Involved in Trusting a Pre-Approval
Taking the extra step can make your offer more appealing to sellers. And despite the temptation to submit an unconditional offer, approval is necessary to get you out of worst-case scenarios.
Below are risks involved when providing a pre-approval:
The Appraisal Comes in Low
When you ask mortgage professionals for loans, they look up the property and confirm whether it is actually worth what you are willing to pay. This is a safety precaution taken for when a client might default and end up selling the home to recover the cash.
In most cases, the appraisal matches the offer being made. However, sometimes, the appraisal comes lower than the price you offered. This means you’ll have to look for additional sources of income to cover the difference or lose the property.
You Never Get Approved for Financing
Pre-approval for a mortgage is not a guarantee for the loan. When a lender is ready to give you a mortgage, they will do a deep check into your credit history and current financial standing. Sometimes, undisclosed debt might suffice or any other issue and this can affect your chances of securing the loan.
You Get Approved, But For a Lower Amount
With pre-approval, there is also a risk that your mortgage provider, when doing deep research into your credit history, may choose to offer a lesser amount than what you asked for. If this is the case, you might be needed to dig up a larger down payment to keep your property.
You Might Lose Your Deposit
During home buying, buyers make offers to home sellers. These offers include cash deposits, which go for around one percent of the total value.
If you don’t include a financing condition, which is absent in pre-approvals, and you end up not securing the financing you might have to withdraw from the sale. And the seller is not required by law to refund your deposit. Often, it is part of the deal that the seller always keeps the deposit.
Legal Penalties
Backing out of a sale at the last stages could lead you to be sued by the home seller for loss of income. This is usually the case when they lose out on another home buyer who was interested in the same property.
Does a Pre-Approval Guarantee an Actual Loan?
No, it does not. However, if you provide correct information and the mortgage provider does a great job at analyzing your credit and income history during the pre-approval process, you will probably get a mortgage within the range you expected.
The Bottom Line
Home buying can be stressful in this hot real estate market where competition is still. And although placing offers with pre-approvals is normal in the current market, remember that there are many risks involved in doing so.
However, with a good pre-approval process, you can expect everything to run smoothly even after the deal is closed. Don’t leave yourself vulnerable to legal and financial risks. Consult with mortgage professionals before making an offer without financial conditioning.