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You Think Your Mortgage Pre-Approval Is A Guarantee? Wrong!

Updated on March 22, 2010

Most mortgage applicants have no idea that lenders reserve the right to cancel a pre-approval should the claims on your application not pan out.

The solidity of the guarantee of pre-approval granted by a lender is iron-clad only as long as there is sufficient verification of the statements made by you when you applied for that mortgage loan. Some individuals have a tendency to inflate their income or understate their liabilities and monthly payments in the mistaken assumption that they will be able to get away with it and qualify for a much larger loan than they would ordinarily be able to obtain.

Although in these cases some pre-approvals are granted, when it comes time for the final approval and all the documentation presented by you is verified, any misstatements you made will come to light and then the lender will either diminish the amount of mortgage funding they are willing to advance, or terminate the deal entirely.

In those cases you will have a pre-approval document in your hand which means nothing as the funding is not going to be forthcoming.

The biggest problem this presents is that you may have presented an offer based on the amount of money the lender stated they would loan you and now you will find yourself short by as many as hundreds of thousands of dollars.

It is a fool's errand to attempt to mislead a mortgage lender as to your financial qualifications to service the loan as they will inevitably find out and you will be facing a situation where you will lose the opportunity to buy that home of your dreams. Nobody wants that to happen!

Interest rates can also vary from the amount stated in the pre-approval documentation. If the complete verification of your financial status shows the lender that you are worse off than they thought, they can demand a higher return on their investment as you now present a considerably greater risk of default. Therefore, even though most pre-approvals present the borrower with a guarantee that the interest rate stated will be applicable to the actual mortgage within 120 days, all of these assurances become null and void when the information you originally presented does not match reality.

Having all your documentation in order before applying for a pre-approval is by far the best way to ensure that the amount and terms on your pre-approval document and your actual funding will be a precise match. Some applicants actually end up understating their income as they are not fully aware of what a lender will acknowledge as acceptable wages.

Let's assume that you earn $50,000 a year, but you have consistent annual overtime earnings of approximately $10,000. If you have the receipts and the income tax notices of assessment for the past three years to prove this level of earnings, your lender will consider your income as $60,000 a year rather than $50,000 a year, which will result in your qualification for a considerably higher mortgage.

Many pre-approved mortgages come to naught. Either the applicant decides to not purchase a property at that time, or the pre-application is voided when inconsistent information comes to light. The process of approving a mortgage is extremely time consuming and costs a substantial amount of money as it involves income, asset and liability verifications; credit reports; property appraisal; and more activities that consume effort and resources. When an applicant either with full intent or with blissful ignorance misstates information on their application, everyone loses.


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    • profile image

      maggiebb 5 years ago

      I know a place you can check to see if you qualify for a home loan pre approval in north Georgia. You can check online, it's what I did. Here is where I found the info

    • Hal Licino profile image

      Hal Licino 8 years ago from Toronto

      Don, thanks for your comment. Seasoned home owners like you certainly know your way around, but a lot of neophytes can definitely be confused by the terminology.

      James, thanks for the in depth inside information. Much appreciated!

    • profile image

      James Mucci - Michigan Refinancing 8 years ago

      There are also many levels of "pre-approval" as well. Many times the pre-approval is nothing more than a credit review and a non verified loan application, essentially as you are referencing. In some cases a borrower can submit his/her documents for a more accurate pre-approval, but that still does not guarantee approval.

      Anything can change and lately has, while you shop for a home. The lender's underwriting guidelines, for example can get more restrictive, and even if you stated everything accurately , you may qualify for less of a loan. Also rates can and likely will change until you actually lock-in your rate. This is usually not allowed until you have a property under contract in today's mortgage world.

      I could go on, but the takeaway is a pre-approval is basically a verification that you have a good chance of being approved, assuming there are no major changes, while you shop for your home.

    • Don Simkovich profile image

      Don Simkovich 8 years ago from Pasadena, CA

      I'm surprised most consumers think that pre-approval is a guarantee. But then again, I've bought four or five houses and am somewhat used to the process. Good Hub, Hal.