Mortgage pre-approvals are letters issued by a bank after a consumer's income, debt and credit history have been reviewed. These letters provide a statement showing the total amount of a loan that a consumer is approved to obtain in a home purchase. However, a pre-approval is not good for an indefinite amount of time.
When submitting an offer to purchase a home, a consumer is recommended also submit a pre-approval letter. This provides the seller with a higher level of assurance that the borrower can qualify and close on a property. When taking a pre-approval letter into account, the date of issuance is also important to the seller as more recent pre-approvals tend to have a better likelihood of closing as the data received by the lender is more recent.
Pre-approval letters will range based on the type of the loan that the consumer selects. However, pre-approval letters can be issued for multiple types of qualifying loans. When a consumer is pre-approved for a conventional loan, for example, she could also be dually qualified for a FHA loan. Depending on the property type, both letters could be submitted with an offer, or a single letter can be submitted with an offer.
Lenders are in charge of setting their own guidelines in reference to how long a pre-approval is valid. Some lenders will set a guideline of 45 days, while others will go as long as 90 days. However, should a pre-approval letter expire because the borrower hasn't found the right house, he can obtain a new pre-approval letter once the lender has re-verified his income, debt and credit situation. If all of these items remain in tact, a new pre-approval letter will be issued.
The greatest benefit to borrowers who have a pre-approval letter in hand when home shopping is the likelihood of having an offer accepted by a seller over a buyer that does not have a pre-approval letter. Sellers will typically even take an offer lower than sales price if a pre-approval letter accompanies it, as opposed to a higher offer with no pre-approval letter. The reasoning behind this is that a seller does not want to tie up her home in the purchasing process if a borrower isn't likely to close.
Make no mistake a pre-approval letter, while important, is not a guaranty of a loan. The borrower must continually provide updated income, debt and credit information to the lender from the date of contracting on a property to the date of closing. Should the borrower open new credit accounts, make large purchases, or have derogatory items added to his credit history during the home purchase process, the loan will be canceled, regardless of the borrower's pre-approval status, preventing closing.
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