What Advice Do Mortgage Brokers Give for the Loan Pre-Approval Process?
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What Advice Do Mortgage Brokers Give for the Loan Pre-Approval Process?
Navigating the loan pre-approval process can be complex, so we've gathered seven pieces of advice from mortgage industry professionals. With insights from Mortgage Brokers to Underwriting & Risk Consultants, our experts weigh in on everything from understanding the difference between pre-approval and pre-qualification to managing expectations during the pre-approval process.
- Understand Pre-Approval vs. Pre-Qualification
- Mortgages Tailored to Your Situation
- Factor in All Closing Costs
- Pre-Approval Is Not Final Approval
- Start Pre-Approval Early with a Broker
- Distinguish Pre-Qualification from Pre-Approval
- Manage Expectations During Pre-Approval
Understand Pre-Approval vs. Pre-Qualification
A piece of advice I always give my clients is the difference between a bank pre-approval and a mortgage pre-qualification. They may be similar concepts, but there are some significant differences between the two:
Bank Pre-Approval:
1. Typically, a more general assessment of your financial situation by a bank.
2. May not be as thorough or specific as a mortgage pre-approval.
3. Can give you a rough idea of how much you might be able to borrow from that particular bank.
Mortgage Pre-Qualification:
1. Involves a more detailed and thorough assessment of your financial status.
2. Requires you to provide documentation up front, such as tax returns, pay stubs, and bank statements, thus providing an accurate assessment.
3. Gives you a clearer picture of how much you can borrow, the interest rate you might qualify for, and other terms of the loan.
Ultimately, in today’s competitive environment, a mortgage pre-qualification is beneficial when you are serious about buying a home, as it provides a clear indication of your borrowing capacity and can make your offer more competitive when submitting a bid on a property.
Mortgages Tailored to Your Situation
Although there are many tips I would advise buyers about regarding the pre-approval process, the main one is that mortgages are not one-size-fits-all. What may work for your friends, neighbors, and colleagues may not be the best product for your specific situation. It is never too soon to speak with a loan officer and see what programs and products you might qualify for—and in most cases, there is no obligation, fee, or hard credit check. In markets where there are several different types of properties (condos, co-ops, single-family, multi-family, etc.), it is also important to understand the rate implications for the specific type of property you are interested in. Many times, rates and options offered for condos and single-family homes can differ from those offered for co-ops. Speaking with a loan officer or mortgage broker is a great place to start to get all of your questions answered.
Factor in All Closing Costs
I always like to ensure that clients are realistic about the closing costs in addition to their down payment. In our market, I recommend that they set aside 3% of the purchase price to cover all costs, including deed transfer tax, lawyer costs, inspections, adjustments, etc. Early in my career, I noticed a lot of clients were surprised by how much the closing costs actually were, and they would only find this out a couple of days prior to closing, putting them in a stressful situation. Another big piece of advice I give clients when we are doing a pre-approval is to not make any changes until they close on their new home. All too often, I see clients go out and buy a new truck or switch jobs and then come back with an accepted offer, not realizing that it affected their pre-approval.
Pre-Approval Is Not Final Approval
This is the most critical step in the process that absolutely cannot be skipped unless you have enough liquid cash in the bank that you do not need a mortgage. Wouldn't we all wish that were the case? Since this is not the current reality, a mortgage pre-approval is critical. This will inform you of your maximum mortgage amount based on your current income and debts and provide a hold on the rate. Homebuyers must know that a pre-approval is not worth the paper it's written on as far as providing any kind of guarantee to receive final approval of financing. No matter if the pre-approval comes from a mortgage broker or your bank, it has the same negligible value for approval. Lenders and mortgage loan insurers (insurers do not even look at pre-approvals) do not do a final review of your documents and complete confirmations for final credit approval until you have a live deal, during which they also consider the property you have under contract.
Start Pre-Approval Early with a Broker
Certainly! One key piece of advice I would offer to homebuyers is to start the mortgage pre-approval process early and work with a mortgage broker. Starting early allows you ample time to address any potential issues with your credit or financial situation, ensuring you are in the best position to qualify for a mortgage. Working with a mortgage broker is particularly beneficial because they have access to a wide range of lending options and can shop around for the best rates and terms tailored to your needs. By leveraging their expertise and connections with various lenders, they can help you navigate the complexities of the mortgage market, ultimately finding a solution that best fits your financial goals. This proactive approach can save you time, money, and stress, making your homebuying journey smoother and more successful.
Distinguish Pre-Qualification from Pre-Approval
It's important to know the difference between a pre-qualification and a pre-approval.
Ensure that you work with a licensed mortgage broker who reviews your income. If you're an employee, they should request documents like 2 years' T4s, a letter of employment, and your most recent pay stub. If you're self-employed, they will ask for 2 years' T1 Generals, and sometimes 12 months' bank statements—depending on the mortgage approach.
If you have provided no documentation and have just told a bank your income, that is a pre-qualification, not a pre-approval. The income you think you can use to qualify for a mortgage may not be what you can actually use. Do the work upfront to ensure you know what you can qualify for; that way, when you find your dream home, you know it's within your budget.
Manage Expectations During Pre-Approval
When homebuyers start the process of pre-approval, it's essential to remain level-headed. Realtors and mortgage agents tend to present the most optimistic financial scenarios possible, showcasing the maximum that buyers might afford. Conversely, lenders approach pre-approvals from a more conservative standpoint, often presenting lower figures based on rigorous financial scrutiny. This discrepancy can lead to significant dissonance in the information provided to buyers. Additionally, the emotional weight of purchasing a home can amplify these inconsistencies, potentially setting buyers up for a challenging journey. It's crucial for buyers to manage their expectations and prepare for various outcomes in the home-buying process.
