Typical Pre-Approval Pitfalls and How to Avoid Them
06.03.2022 | Category: Homebuying
When looking to buy a new home, getting preapproved by a lender is the first step toward homeownership. A preapproval letter will show how much a lender is willing to let a homebuyer borrow, as well as the estimated interest rates and fees expected to be paid. It assures sellers that you’re financially ready to take on the responsibilities of homeownership.
Once you think you’re ready to work with a lender to secure a preapproval letter, you’ll submit your application. Once approved, you’ll start working with a real estate agent. The preapproval letter is usually needed before you’ll look at homes with an agent and will be required as part of any offers you submit. Before you contact a lender to apply for preapproval, it’s important to know how to best position your financial situation and avoid these common pitfalls for preapproval.
Avoid Applying for New Credit
Your credit is one of the most important factors for getting approved. Any large purchase that requires financing will impact your debt-to-income ratio (DTI). If you can wait, try to postpone any large purchases until you’re settled into your new digs. This includes co-signing on a loan or adding anyone as an authorized user to any of your accounts.
Avoid Expensive Purchases
If you need to finance the purchase of a car or other large purchase, you’ll find this impacts your overall debt to income ratio. And you might not get approved for the home loan amount you were looking for. Any large withdrawals from your banks will be flagged for further review. It won’t necessarily prevent you from being approved, but it might impact the amount you are approved for because it will impact the amount in your savings account and reserves.
Avoid Moving Large Amounts of Money
Moving around large sums of money, like withdrawing from an investment account or deducting from your savings could be a red flag that your finances aren’t quite ready to take on a large loan like a home mortgage. If you’re considering a big money move, try to plan it about 30 to 90 days in advance for applying for preapproval, and be prepared to explain the move in case you’re asked about it.
Avoid a Major Career Move
Thinking about leaving your stable job to work for yourself? Or take a better offer with a larger company? Think twice before making the jump. You’ll be asked to show about two years of bank statements and a history of pay stubs to show you can responsibly take on the monthly mortgage payment. Lenders might hesitate if you have less than 12 months with an employer or seek additional financial records if you work for yourself.
Avoid Scammers or Identify Theft
Every year, credit users are entitled to a free credit report from each of the three credit bureaus that provide a detailed record of every line of credit and your entire history with the lender. Before you apply for a mortgage loan, review your credit report for any accounts that look unfamiliar, names that aren’t yours or addresses that you never lived at. If you find information that doesn’t look quite right, you should contact the reporting credit bureau and determine if the item needs to be corrected or if it’s a potential instance of identity theft.
Lastly, be on the lookout for potential scams. This usually starts with a phone call from a supposed lender. They might promote a guaranteed preapproval even if you have bad credit or instant preapproval. Most of the time, they’ll overcharge you for their services and the loan you get will have an extremely high interest rate. This is all assuming that they’re lenders and not an impersonator phishing for personal information that could negatively impact your credit.
Avoid Going in Unprepared
When it comes to buying a home, you find out quickly that everything is on a timetable, either yours or theirs. You don’t always get to choose. Contacting a lender and asking the right questions beforehand to learn about the process will help you avoid some common mishaps when getting preapproved for a home loan.
When applying for a preapproval, you want to make sure that the lender is doing a full assessment. This means they are looking into your financial history and your present financial situation. They should be doing a deep search into your finances. Keep them informed of any snags that you’re concerned about. It’s better they know ahead of time than for it to come up later.
Find out how long your preapproval will last. While most lenders give 90-day approvals, some issue 60 or even 30-day approvals. It’s important to find out what the limit is before you apply, and time it carefully. Make sure you are truly in the market before making any commitments.
Avoid Setting Unrealistic Expectations
It’s important to keep your expectations realistic when looking for a new home in the market.
Applying for a preapproval can be stressful, but it doesn’t have to dominate your life. Never be afraid to ask questions. Preparation is key. You shouldn’t have to get preapproved more than once.
Interested in learning more about your preapproval options? Contact a Mutual of Omaha Mortgage licensed professional and get started with your homeownership journey today!