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Preapprovals prove less reliable

Self-employed borrowers learn lesson the hard way

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In a tight market, preapprovals are needed more than ever to establish the financial bona fides of home purchasers. Unfortunately, preapprovals have also become less reliable, especially for self-employed borrowers.

A preapproval is a statement by a lender that a prospective buyer has the income, assets and credit to be approved for the mortgage required to purchase a house of some assumed value. The statement is an opinion, not a commitment. Realtors frequently recommend that prospective purchasers get preapproved so that home sellers will take them seriously. Probably just as important to Realtors, they don't want to waste time on buyers who can't qualify for the loans needed to complete purchases.

A preapproval letter may be expressed in terms of a maximum monthly mortgage payment, a maximum loan amount, and/or a maximum ratio of loan to value. If a mortgage payment is shown, the interest rate used to calculate it may be shown, but the rate ...