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Posted On: 11/16/2016

Question: We went to a lender – as you often suggest – and were pre-approved for a mortgage before looking for a house. The lender said we qualified for as much as $175,000 in financing. We then went looking for a property, made an offer, the offer was accepted and now the lender says we only qualify for $160,000. What happened?

Answer: There's a big difference between a pre-approval and a pre-qualification, but one thing they both have in common is that neither is a loan commitment.

In general terms a “pre-qualification” letter can be seen as an estimate of your financial capacity while a “pre-approval” letter reflects a more rigorous look at your credit, income, debts and assets where you actually have to show some basic documentation to the lender. However, there is no set definition for either term so what seems like a “pre-qualification” letter from Lender Smith may be called a “pre-approval” letter by Lender Jones.

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According to the Consumer Financial Protection Bureau (CFPB), “This letter helps you to make an offer on a home, because it gives the seller confidence that you will be able to get financing to buy their home. It is not a guaranteed loan offer.”

So why did your lender’s mortgage change?

Any number of reasons can arise that causes a lender to change their assessment of your finances. Here are a few that stick out.

First, your car died so you went and got a new one. Fair enough. However, the old car had been paid off while the new one is being financed. That means you have a new monthly expense and therefore less ability to finance a mortgage. Example: You have a household income of $8,000 per month. Up to 43 percent of your monthly income – $3,440 in this example – may be used for recurring debts such as credit cards, student loans, auto payments and housing costs. If the auto financing costs $485 – about the average new car payment in 2015 according to Experian – you now have 485 fewer dollars that can be used for housing costs.

Second, a week after you were pre-approved your employer cuts overtime. When the lender again checks your income there is less of it so your ability to qualify is smaller.

Third, the lender said the qualification letter is good for 90 days. More than three months have passed since you spoke with the lender.

Fourth, your credit score falls as a result of the new car loan and a late credit card payment.

Fifth, mortgage rates go up.

So, unfortunately, a pre-approval or pre-qualification letter is not a loan commitment, it's not a promise to lend a certain amount. It's merely a way to suggest how much financing might be in the ballpark subject to various terms and conditions. If those terms and conditions change then all bets are off.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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