Goodspeed: Always get preapproved for a mortgage
QUESTION: We got prequalified from our lender for a loan amount. We made an offer on a house for this amount and had a finance contingency inserted in the offer. But when we produced the letter from our lender, our realtor said this was not proof of financing and we needed a firm commitment from our lender. Apparently, our letter is not considered a firm commitment. Our finance contingency is going to expire in a few days. What should we do?
ANSWER: Getting “prequalified” from a lender for a home mortgage is not the same as getting “preapproved.” This is a mistake many homebuyers make.
Prequalified means only that the lender has done a rudimentary assessment of your finances, and based on this quick read, thinks you will qualify to borrow X amount. It is not a firm commitment that it will lend you X amount.
“Preapproved” means the lender has gone over all of your written documentation – pay stubs, tax returns, bank statements, credit reports, etc. – and based on the evidence offers you a firm commitment to lend you X amount.
Homebuyers should always get preapproved before they start looking for a home. The preapproved amount gives them a budget to shop within and good certainty that they will be able to meet the finance contingency in their offer. (A finance contingency should always be inserted into an offer whether you have been preapproved or not. Things can always go wrong at the last minute, so always protect yourself with a finance contingency.)
OK, that is what you should have done. So what do you do now that your finance contingency is about to expire? Immediately go back to the seller, explain that you thought you had a firm finance contingency but you don’t, and request a two-week extension on the finance contingency. Get this extension in writing. Then go to the lender and ask for a firm financing commitment. Hopefully, this will come back the same as the prequalified amount.
If the seller will not agree to a two-week extension, then you have three options: 1) you can try to use the remaining time before the contingency expires to get a firm commitment from your lender. 2) You can exercise the finance contingency and walk away from the deal. You should do this in writing. 3) You can go forward with the deal and hope your lender will come through with the loan amount before the closing. Obviously, this is very risky. If you do not get the loan, you could lose your deposit and also risk being sued for breach of contract.
Linda Goodspeed is a longtime real estate writer and author of In and Out of Darkness. Email her at: firstname.lastname@example.org.