Buying a home amid rising rates

A preapproval letter is like a license to buy a home; without it, a seller won’t take a buyer seriously.

A preapproval is a statement from a specific lender on how big a mortgage loan they’ll extend. Keep in mind though that preapproval letters have a short shelf life.

After a couple of years of flat and declining rates, mortgage interest levels have gone up by more than a full percentage point since the end of 2021. And if a preapproval was issued for the maximum amount a borrower could qualify for given interest rate levels at the time, a buyer can have a false sense of his purchasing power.

Jennifer Beeston, SVP of Guaranteed Rate, suggests that buyers ask if a preapproval is for the maximum amount and if there’s any wiggle room if rates rise. Then, check back in with a lender during regular intervals — especially if you hear news reports of rate hikes — to get preapproval at current rates, she adds.

Besides allowing a buyer to make a realistic offer, an updated letter allows buyers to “show sellers that their financial stability is current,” notes BQ TranThien, senior mortgage officer with GI Home Loans.

When a preapproval is written, it typically doesn’t provide a “lock” on the rate — meaning that it won’t hold for a specific period, such as 15 to 60 days. But when a buyer formally applies for his loan on a specific home, rates are locked.

For some buyers, paying for an extended lock is practical, says Ken Pozek of Keller Williams in Orlando, Florida. Here is one example: Buyers who apply for a mortgage on a newly constructed home that may not be available for a few months.

Pozek also advises that he is now seeing buyers who contracted for new construction months ago finding their payment is several hundred dollars more monthly than they had expected.