Why It’s Now Harder Than Ever to Obtain a Preapproval on a Mortgage


Are you in the market for a new home? According to a recent report by Market Watch, it may now be more difficult than ever to buy the home of your dreams thanks to the demise of mortgage preapprovals.

For the past few years, prospective home buyers would get their preapprovals before even starting the search for a home. This helped them understand what they could afford and set a realistic budget. This also showed sellers that the buyer’s finances were in order – increasing the chances of the buyer’s offer being negotiated instead of thrown out in favor of other offers. However, that process may now change for many.

The housing market crash of years ago still looms over our economy and these mortgage preapprovals are the latest victim. Since so many mortgage lenders went under with the crash, lenders no longer need to offer preapprovals just to get buyers in the door. The less competition lenders have, the fewer options buyers have.

Prequalifications Becoming A Popular Alternative

Since it’s nearly impossible to shop for a home when you have no idea what you can afford, many lenders are offering prequalifications as an alternative to preapprovals. What’s the difference? A preapproval is an offer that the lender is making to the prospective buyer. The buyer learns how much they will be approved for and at what interest rate. Then, if the buyer returns to that lender for the mortgage, the offer becomes a binding commitment that the lender has to follow. As long as it’s within the preapproval timeframe, the lender can’t suddenly rescind the offer or change the terms.

A prequalification isn’t binding the way a preapproval is. With a prequalification, a lender is telling the buyer what they could  qualify for – not necessarily what they will prequalify for. If the buyer returns to the lender for the mortgage, the lender can change the terms of the offer at will. And if the APR is higher than originally expected – or the loan amount lower – that could end up in the buyer losing the house.

How You Can Increase Your Odds of Obtaining a Mortgage

This picture certainly isn’t a rosy one for prospective buyers – but not all hope is lost. There are things you can do to improve your odds of getting the mortgage you need for your next home.

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First of all, saving for a higher down payment makes a direct impact on the loan amount you’ll qualify for. Typically lenders advise prospective buyers to save at least 10% of the desired loan amount for a down payment. But if you can get that number closer to 20% or higher you’re more likely to be approved for your desired loan amount. Some people also use this tactic to increase the amount of the loan they may qualify for. Just be sure not to buy more house than you can afford!

The second thing that can make or break your mortgage offer is your credit score. If you have a low credit score your chances of obtaining a mortgage at all decrease greatly.  And if you have a prequalification you’ll probably end up with higher interest rates than were initially quoted to you (since those are based off of average interest rates). That means if buying a home is in your near future, take steps to increase your credit score now. How can you do this? Focus on decreasing your debt and make sure to make every payment on time every month. Even one late payment can drastically lower your score. If you end up paying off a debt account in the process of lowering your debt, make sure to keep it open at least until the mortgage goes through. That improves both your debt to income ratio as well as the length of history on your accounts – both of which will have a positive impact on your score.

The housing market has been volatile for years and there’s no clear end date to the uncertainty of the market. That’s why it’s so important to arm yourself with the knowledge and tools to make sure you can obtain your financial goals – no matter what’s happening in the market.

Image Credit: dalylab

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  • Saving for a larger downpayment is extremely important because it increases the probability you will get approved and your interest rate (and monthly capital payments) will all be less with a larger deposit.

    • Shannon_ReadyForZero

      You’re absolutely right!