A pre-approval is a way to be a step ahead when it comes to house hunting. It is a requirement for all homebuyers who plan to use a mortgage loan to finance their purchase. Over the years, we have seen hundreds of borrowers knock themselves out of qualifying range after getting pre-approved.
What Does Getting “Pre-Approved” For A Mortgage Mean?
Not to be confused with a pre-qualification, a pre-approval is an in-depth verification process your lender will conduct to ensure you are a viable mortgage financing candidate. Your lender will have you fill out a loan application and ask you to upload additional documentation paper-trailing your financial history. After analyzing your finances, they will issue you a pre-approval letter for a mortgage loan up to a certain amount. This form is known as a pre-approval letter, and it can make your offers substantially stronger and more competitive, especially in hot markets.
Actions To Avoid After Getting Pre-Approved
The actions below should be avoided after getting pre-approved. These actions do not always disqualify borrowers, but they do prevent lengthy delays and the need for additional time-consuming paperwork.
1) Do NOT have relatives deposit “gift funds” into your account.
It is best to have them deposited directly to escrow instead. If they are deposited into your bank account, we will need a copy of your donor’s bank statements in order to “paper-trail” the transaction.
2) Do NOT make any transactions or deposits that cannot be explained or sourced.
All large or recurring deposits and withdrawals must be explained and/or “paper-trailed.” Any deposits from mattress money, untraceable foreign bank accounts, crypto accounts or cash payments of any kind can render an entire bank account invalid and unusable for qualifying. If any transfers are coming from another account, we will need to provide 2 months of statements for this account as well. If you need to make large deposits that are difficult to “paper-trail” or have crypto investments, contact us for “coaching” or advice. Keep a paper-trail for every large deposit you make.
3) Do NOT liquidate (buy/sell) crypto before going into contract.
If you are planning to use funds currently held as cryptocurrency toward your purchase, please contact your Client Advisor and discuss the best ways to do this.
4) Do NOT change jobs without consulting us.
Job changes can pose a risk to qualification – especially if you are relying on the use of bonus, overtime, or commission income to qualify. This is because lenders need a history of those income sources with your current employer before they can use the income for qualification purposes. Please check with us before making a job change to ensure it does not affect your ability to qualify for the loan you desire.
5) Do NOT take on new debt.
If you increase credit card balances or finance a vehicle, your debt ratios will be adversely impacted, reducing your maximum purchase price.
6) Do NOT take unpaid days off.
If your debt ratios are high or near the limit, even a single unpaid day off from work can push you out of your qualifying range.
7) Do NOT spend substantial liquid assets.
Pre-approval software relies on specific liquid asset levels; pre-approval amounts can change if liquid assets are significantly reduced.
8) Do NOT miss payments on any debts reported on a credit report.
Even though this is relatively obvious we like to remind buyers that missing any monthly payments can sharply reduce their credit score and their qualification amount.
9) Do NOT co-sign for someone else’s debts.
Even if you are just a “co-signer”, the debt will still show up on your credit report. You will be responsible for that debt and the payments (unless we can show twelve canceled checks from the person making payments, in most cases).
10) Do NOT file taxes with a tax liability owing, or with less income than in previous years.
This applies to self-employed borrowers primarily, particularly during tax season. We always base our qualifying income on the most recent filed tax returns, and we must prove that all tax liabilities are paid. We recommend that borrowers file an extension when possible if they are making offers during tax season. Please consult with us for additional explanation.
11) Do NOT make any transfers from business accounts.
Business accounts are more carefully scrutinized than personal accounts. If any large transfers are traced back to business funds, additional documentation will be needed and added requirements will have to be met. This includes having a CPA write a letter to confirm that the use of these funds will not negatively impact your business.
12) Do NOT send your Earnest Money Deposit (EMD) from a business account.
Because the EMD is a portion of the down payment, it is held to the same guidelines as the other funds being used toward the purchase. The EMD should come from an approved account and will need to be paper-trailed. If the EMD comes from a business account, additional documentation will be needed to meet the stricter requirements.
13) DON’T FORGET to lift all freezes on your credit report until your loan closes.
Once you are in contract on a property, you will likely be asked to lift any ‘freezes’ with the Credit Bureaus (Equifax, Experian and/or TransUnion) in order to lock in your interest rate. Once you unfreeze these reports, do not reapply the freeze until AFTER your loan closes.
Frequently Asked Questions
What is a mortgage pre-approval?
A mortgage pre-approval is an in-depth verification process where your lender reviews your loan application and financial documentation to confirm you are a viable candidate for mortgage financing. Once approved, the lender issues a pre-approval letter stating the loan amount you qualify for. This letter strengthens your offers and makes you a more competitive buyer, particularly in active markets.
Can taking on new debt after pre-approval affect my qualification?
Yes. Taking on new debt, such as financing a vehicle or increasing credit card balances, will raise your debt-to-income ratio and can reduce your maximum purchase price. It is important to avoid any new debt obligations between pre-approval and closing to protect your qualification amount.
Why do large or unexplained bank deposits cause problems during the mortgage process?
Lenders are required to paper-trail all significant deposits and withdrawals in your bank account. Deposits from cash payments, untraceable foreign accounts, or cryptocurrency that cannot be properly documented can render an entire bank account invalid for qualifying purposes. If you need to make large deposits or transfers, consult your lender in advance to ensure they are handled correctly.
Can changing jobs after pre-approval put my loan at risk?
Yes, job changes can pose a risk to your qualification, especially if you rely on bonus, overtime, or commission income. Lenders typically require a documented history of those income types with your current employer before they can be used to qualify. Always consult your lender before making any employment changes during the homebuying process.
What should I know about credit freezes during the mortgage process?
If you have a freeze on your credit report with Equifax, Experian, or TransUnion, you will likely need to lift it once you are in contract on a property so your lender can lock in your interest rate. Once the freeze is lifted, do not reapply it until after your loan has fully closed.
Are there financial actions that could delay or derail my closing?
Yes. In addition to taking on new debt or changing jobs, actions like missing payments on existing debts, co-signing for someone else’s loan, spending down significant liquid assets, or making transfers from a business account can all create delays or additional documentation requirements. The safest approach is to keep your finances as stable as possible from pre-approval through closing and check with your lender before making any significant financial moves.
Pre-Approval Questions? Keep In Touch With JVM Lending
If you have questions about the homebuying process or getting pre-approved, contact JVM Lending. Our expert Client Advisors and Mortgage Analysts are available 7 days a week to answer questions and guide you through the mortgage process.
