What a mortgage preapproval checks, and what it doesn't promise

A self-employed client of ours was buying a house, and everything on the file had cleared. Then the IRS came back with no record of the previous year's tax return. The client's tax preparer had filed it late, and the loan couldn't close without that year on record.

We wrote to both real estate agents to tell them what had happened. We also told them we'd move straight to closing the day the tax transcripts arrived.

We tell that story because it's the clearest way we know to explain what a preapproval is. It's a careful look at everything that can be checked today. It isn't a promise about what turns up tomorrow.

What is a mortgage preapproval?

A preapproval is a letter from a lender that says how much it's willing to lend you, based on a look at your finances. You use it when you make an offer, so the seller can see that you can likely get the financing.

The Consumer Financial Protection Bureau makes a point worth knowing here: neither a preapproval nor a prequalification letter is a loan offer. The letter says what the lender is willing to do if everything holds up. The loan itself comes later, after the house, the appraisal and the rest of the file have been reviewed.

Is a preapproval the same as a prequalification?

Not always. This is the confusing part: the CFPB says lenders use the two words differently. Some lenders write a prequalification from what you tell them, without checking it, and save the word preapproval for when they've verified your information.

So the name on the letter tells you less than you'd think. The better question for any lender is what they looked at before they wrote it.

What does a preapproval check?

When David or Bri write a preapproval, the file has been reviewed. That means your income and assets have been documented with real paperwork rather than typed into a form, and your credit has been pulled and read. With Movement Mortgage, we can also have the file underwritten before you make an offer, so the underwriter has looked at it before the seller ever sees your name.

When you do make an offer, we call the listing agent ourselves to tell them about you and your file. A letter is a piece of paper. A loan officer on the phone who has read the file is something a seller can weigh.

What doesn't a preapproval promise?

It doesn't cover the house yet, because there wasn't one when the letter was written. The appraisal, the title and the property itself all come after the offer.

It also can't see what changes after the letter is written. A new car loan, a new credit card, a job change or a missing tax transcript can each change the picture. If you're shopping for a house, talk to us before you make a big financial move.

And it can't see what no one knew to look for. That was the client above.

Does a preapproval hurt my credit?

The CFPB says lenders may check your credit when they write a prequalification or preapproval letter, so it's fair to ask. The same page makes the case for doing it early anyway: a preapproval gives you time to find a problem on your credit report and fix it before you're up against an offer deadline.

That's most of what starting early buys you. A problem you find before you start shopping is one you have time to fix. The same problem found in escrow is on a deadline.

When should I get a preapproval?

Before you start making offers, and earlier than you think you need to. If you're thinking about buying in the next several months, now is a good time to find out where you stand, even if you aren't ready to look at houses. If we can't help with what you're after, we'll tell you that up front.

How do I start?

Talk to David or Bri. We can either set up a time to visit by phone or you can get started with an online application, whichever you prefer. There's no charge for the consultation. We're paid by our company when a loan closes, and you never pay us directly. That's one more reason we'd rather find a problem now than in escrow.

Once we have your file, we manage it: we keep track of what the lender needs, tell you what's needed and when, and talk to the agents so you don't have to relay messages. If a tax preparer runs late, we'll be the ones writing that email.

Movement Mortgage, LLC, NMLS #39179. David Chandler NMLS #265974. Brianna Lindley NMLS #1367416. Equal Housing Lender. Not a commitment to lend.