What Happens After a Home Loan Preapproval?

The American dream is often defined as home ownership.

Before a potential home buyer begins shopping for a home, he should get preapproved for a mortgage. This process includes providing a lender with an application and supporting documentation to allow the lender to determine if a borrower would be approved for a mortgage and what loan amount he would qualify for. Once the borrower has a letter of preapproval from a lender, he can begin shopping for a home.

Significance

A letter of preapproval from a lender shows the real estate agent, as well as any potential home seller, that the buyer is not only interested in purchasing a property, but he is financially capable of doing so as well. While the letter does not guarantee that the deal will close, it does give the other individuals involved in the transaction a confidence in the financial ability of the buyer.

Function

Once the preapproval letter is received by the buyer, he can add that letter as documentation to the back of any offer delivered to a seller. Once the offer is accepted and an official contract is signed by all parties, the buyer goes back to his lender to determine if more paperwork is needed. In most cases, the buyer will have to sign disclosures and pay for an appraisal. An appraisal is completed on the home, the supporting documentation is sent to a loan underwriter and once the final approval arrives, the mortgage can move to closing. Once the mortgage is closed, the buyer now owns the home.

Types

Typically, a potential buyer gets a full loan preapproval from a lender. This requires the borrower to fill out an application and provide supporting documentation, and the lender gets a mortgage underwriter to officially approve the borrower's application. Alternatively, a borrower could simply get a mortgage prequalification, which is simply the process of a lender determining what loan amount the buyer could qualify for, given basic information provided in the application.

Considerations

A mortgage preapproval does not mean that the buyer will be able to close the mortgage, it simply means that there is a great likelihood that he will be able to close. Any variable that changes in the situation could disqualify the borrower. For example, if the borrower's credit score drops between the time of application and the time of closing, he may not be able to close the mortgage. Additionally, if his financial situation changes, such as a loss of a job or a decreased salary, he will not be able to close the mortgage.

Benefits

Not only does a buyer with home loan preapproval have a stronger offer to show a potential seller, but he has an education about his financial standing as well. During the preapproval process, the lender will inform the buyer as to what loan amount and down payment he can afford. This helps the buyer to shop for homes in the proper price range, which could be higher or lower than anticipated. This keeps the buyer from falling in love with a house out of his price range and helps him to get into a house that he will be able to afford in the long term.

References

• The Federal Reserve Board: Understanding the Home Mortgage Process
• Wells Fargo: FAQ: The Prequalification and Application Process