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What is Mortgage Pre-Approval and Why Would You Want It?

Sep 21, 2017



Smart home buyers are pre-approved buyers.

Not pre-qualification, pre-approved.

There’s a huge difference – it’s the difference between being able to buy a house or not.


What is Preapproval and How is it Different From Pre-Qualificaton?


Pre-Approval is the process of having the bank verify the state of your finances and, based on that, approving or denying your application for a mortgage. 

The process requires proof of employment status, adequate credit report, proof of income, proof that you have funds to cover the down payment and closing costs.  These are the material things any lender will need before forking over the dough. 


Pre-Qualification is the process of you telling the bank your state of finances. Based on what you tell them (unverified), they estimate you might possibly be approved for a mortgage, assuming all is proved true during the approval process. For pre-qualification though, they verify nothing. 


The key difference is verification. Only with proof and verification can one get a dime of bank money.

Why Should You Get Pre-Approved?

In a nutshell, markets are changing and banks are cracking down.

In the past people could kind of squeak by with without preapproval, but it involved a ludicrous amount of last minute scrambling to find a bank to fund the mortgage. All the dashing around for last minute mandatory things (like funds for downpayment and closing costs, letters of employment, income tax papers etc.) wasted gas, time, and paper. Worse than that, if the mortgage didn’t go through, wishful buyers were also out the money for inspections and appraisals, which can land at around $1000 or more. 

Markets have changed though, and banks are scrutinizing transactions. Instead of launching people into home ownership who really can’t afford it, they’re doing their due diligence. 

Under the new rules, with the tightening of belt and increases in interest rates, there is no reason any buyer should be out looking at homes until they’ve gone through the pre-approval process with their lender. Then they know what they’re dealing with, what mortgage terms they can expect, and can be prepared for the costs that lie ahead.

What Happens After Pre-Approval?

Once a hopeful buyer secures their pre-approval, the next step is to ensure the property complies with the bank’s and mortgage insurers requirements. 

If the home meets the bank’s and insurers standards, and nothing has changed with the buyer’s credit, situation at the time of application or finances since the pre-approval, the mortgage is approved and remains so as long as there are no material changes at the time the mortgage money is funded (this could be a couple of weeks to a month after possession has occurred). 

If there have been changes though – like a loss or change of job, a large purchase, dissolution of a relationship when both are on the application or the like – the bank is not obligated to fund the mortgage. This can be a big problem if the conditions of the Offer to Purchase have been satisfied, obligating the buyer. (More on how to protect yourself against that here.)


In my over 25 years in real estate, I’ve seen too many buyers who were not pre-approved (and even some who were), cause much last minute scrambling for themselves, their lawyer and for the lenders. I felt sorry for those bankers – their stress in those circumstances was astronomical. I’ve even seen a banker suffer from stress and stress induced hives from all the work they have to do at zero hour. All I could think was, “Gosh! Glad I’m not their banker or lawyer!” Poor guys…


How to Prepare for Pre-Approval

We automatically prepare for things like shopping or a trip. How much more should we prepare for purchasing a home?

If you’re committed to buy a home, go in prepared.

First, gather the information you’ll need for the lender to give you a pre-approval. This includes things like a Letter of Employment, pay stubs, tax assessment statements. Knowing your own credit rating ahead of time is helpful too and, if there are blips on your credit, do what you can to fix them. Get letters of explanation where the blips are not your fault, resolve the ones that are, and keep your nose clean in the meantime.


I've created this Free Pre-Approval Checklist for you. Grab it here!

(No email subscription needed - just grab and go)


Category: Buying a Home

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