Pre-Approval and Closing Guarantees: What You Need to Know
First-time buyers were responsible for 29% of home purchases in September, up from 28% a year earlier, the National Association of Realtors said in a report on Thursday.
That journey to homeownership comes with lots of jargon. At times, it can feel likely you need to take a class to nail down the terminology.
Preapproval and closing guarantees are two important steps in the home buying process. Both are optional steps for buying a home. But each can give you more confidence as you march towards the closing table.
If you are buying a home, paying attention to preapprovals and closing guarantees can make for a smooth process.
» Expert Tip: Looking to buy soon? Set yourself up for having your offer accepted on a home by getting preapproved for a mortgage prior to your home search.
What Is Pre-Approval?
The mortgage pre-approval process is designed to help you find out how much a lender is willing to lend you for your home purchase.
Essentially, the process involves a lender taking a close look at your financial picture to determine what size loan you can afford to repay. After all, the lender wants to make sure that you can afford to repay the loan on schedule.
Be prepared to provide a lot of financial paperwork, like your W-2 and tax returns, as you work through the pre-approval process. Handling this paperwork upfront often means your lender can move faster after you make an offer on a home.
And, don’t get mixed up between a pre-approval and a pre-qualification. The first means your lender has pulled your credit report, looked at your income documentation, and decided you likely will qualify for a mortgage. A pre-qualification means you’ve had a discussion with a lender or mortgage broker and gotten a general idea of the size of mortgage you might be able to get – it won’t impress a seller or their real estate agent.
“A pre-approval shows sellers that you are a serious and qualified buyer, which gives you an edge over other buyers who have not gone through the pre-approval process,” said Josh Craven, mortgage advisor and CEO of Sprint Funding.
When you have this pre-approval in hand, it gives your future home offers an edge over the competition. Sellers often prioritize offers from pre-approved buyers due to a higher chance the funding will come through.
Beyond getting an edge in a competitive housing market, a pre-approval gives you a closer look at the costs of the loan, said Craven.
A pre-approval “also helps you to know how much money you can borrow and at what interest rate before making an offer on a home,” he said. “This way, you can be sure that you will be able to afford the monthly payments on your new home.”
Changes to Your Finances Could Negate a Pre-Approval
A pre-approval takes a deep dive into your financial situation. But it’s only looking at a snapshot of when you applied for the loan.
Typically, a pre-approval is only valid for a set number of days. However, changes to your financial situation during that window could negate the pre-approval offer. For example, if you have to spend all of your emergency savings on replacing your vehicle, your diminished assets might not be enough to qualify for a home loan anymore.
Not every financial change will impact your pre-approval. But it’s important to be open and honest with your lender about any changes.
What Is a Closing Guarantee?
With a closing guarantee, the lender promises to pay the buyer or the seller a certain amount of money if the closing doesn’t proceed as scheduled. Not all lenders offer it.
Of course, this only applies if the delayed closing is a result of the lender making a mistake. But changes to your financial situation would likely negate most closing guarantees. For example, if you lose your job, that might change the situation from a lender’s perspective. Not only could a change mean the deal is off, but it could also mean that your closing guarantee isn’t valid anymore.
A closing guarantee puts more pressure on your lender to close on time. And it gives you more peace of mind as you navigate the closing process.
“The advantage of a closing guarantee is that the lender has done the complete underwriting on the home buyer in advance of them signing a contract,” said Jeffery Loyd, producing branch manager at Get A Rate. “It provides a higher level of confidence to the buyers and sellers.”
Beyond the boost of confidence, there’s cash on the table if things don’t go according to schedule. Although it’s not the ideal scenario, buyers or sellers could walk away with several thousand dollars if the lender doesn’t close on time.
A closing guarantee is enticing. But not every lender offers one. Depending on your situation, you might decide to work with a lender that offers this extra perk. But make sure to get your closing guarantee in writing. Don’t assume the lender provides it.
Read the fine print
As you work through the mortgage process, it’s critically important to read the fine print along the way. If you are working with a lender that offers a closing guarantee, read up on how to keep up your end of the bargain. If you are getting pre-approval, get all of the details in writing.
» Expert Tip: Thinking about buying a home but want to secure a good rate? Find a lender that gives you the power to lock an interest rate for an extended period so you can shop around for a home comfortably knowing that your rate is secure and won't go up. Get started here!