Preapprovals prove less reliable

Self-employed borrowers learn lesson the hard way

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Inman Connect New York | January 29 - February 1, 2019

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 used is not guaranteed and won’t be until the borrower submits a complete application and the rate is locked. If a maximum loan is specified, it will be contingent upon an appraisal of some minimum amount. The preapproval will also be dependent upon verification of information provided by the borrower and underwriting approval of the transaction.