October 3, 2013 nkad3

But I Was Pre-Approved

226ASP6179944780When it comes to purchasing a home it is a good idea to know how much you can actually afford. Many clients seek preapprovals for two main reasons:

  1. To know that they can get financing before they put in a conditional offer for their home
  2. They were advised to do so by a real estate agent so that they know you are not wasting their time or yours.

In either scenario the ultimate goal is to know how much money you will be able to borrow towards the purchase of your home.  But it isn’t uncommon for many home-buyers to receive a preapproval from the banks but denied the financing when they actually apply. Why is this? Well the answer is quite simple when you think about it. When it comes to actually approving your application for a mortgage there are various documents that are involved to truly understand your “worthiness” of a mortgage. Banks will look at your income statements, credit report, employment history, and more to determine if the “risk” is worth taking in funding your home purchase. When it comes to preapprovals you’ll notice that the “preapproval application” is far less extensive. The preapproval stage is really just a face value or “Income” approach in determining how much you can be approved for, and not how much you will be approved for.  This is why many clients find themselves frustrated after they’ve placed a conditional offer for a home and are ultimately denied by the banks for the financing they needed to close the deal.

So what’s the point of getting a preapproval?… In my opinion, it isn’t necessary! Real estate agents may sometimes convince you of the fact only because they don’t want to invest time in finding you a home if you have no chance to getting approved, for your sake and theirs. But to my previous point on the significance of a preapprovals; they never guarantee that you will get the financing that you need anyways.

If you want to know how much you can afford there is a general rule of thumb you can use without going to the bank. Simply take your annual gross income (plus that of a co-applicant if applicable) and multiply by 5. So if your total gross income (with or without a co-applicant) is equal to 90k then you’re looking at a maximum mortgage of 450k (90k*5=450K). Again the significance of this “rule of thumb” approach isn’t any more guaranteed than the preapproval you would receive from the banks, but since it is fairly accurate to the amount that which you would see on your preapproval anyways, you might as well skip the trip to the bank  altogether.

As you can see, we tend to over exaggerate the importance of the preapproval because in our minds we treat it as a definite yes by the banks, when in fact the real mortgage application has yet to be evaluated based on all other factors not yet considered (income statements, credit report, etc.).

With that said, it doesn’t mean you’re out of luck. If you’ve been denied by the banks, this does not mean there aren’t lenders out there that are willing to help you buy your home. The best thing to do is give us a call and let us find the mortgage you’re looking for; you’d be surprised to learn how easy it is!


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