Why should you receive a Pre-approval? And what does it really mean?

Have you ever wondered why everyone keeps saying that if you are interested in purchasing a home, you should ensure you have obtained a Pre-Approval? It seems that everyone wants to weigh in on this topic whether they truly understand the benefits or not. I guess we have done a bang up job of preaching this statement for as long as I can remember that the majority of buyers ensure this is their first go to step. The problem with listening to everyone else, rather than your Mortgage Broker, is that the average purchaser may not necessarily understand the basic idea of a pre-approval.

Does a Pre-approval guarantee you a mortgage approval? Does it provide a rate hold in a potentially unstable rate market? Or, does it provide security in knowing what you can afford before you head out in the world looking for that perfect home?

Here’s the reality: a Mortgage Pre-Approval offers the buyer with a rate hold but of only one specific term. Many believe that you will have access to numerous terms and specified rates that will be guaranteed throughout the 120 days. This is why it is so important to discuss options, terms and products before deciding on what your pre-approved term will be. You want to ensure that you have the best term and rate secured when you find the home you wish to purchase.

The other misnomer with pre-approvals is that your financing is 100% secure. Unfortunately, this is not the case. Many Lenders do not review your personal information such as your income documents, credit history, down payment and more specifically, the property in question. Under a pre-approval, all the Lender sees is what your Bank or Mortgage Broker provide on the application. None of this information is validated until an offer has been secured. This is why it is so vital that your Bank or Broker follow through with the acquisition of important documentation. It is “our” job to ensure that we have obtained the necessary paperwork to show the Lender that our application contains validated information. Without this being done upfront, we go back to the first part – you truly just have a rate hold. This is why we always request for subject to financing to be placed on all offers (purchase contracts); if not for the documentation but for the property itself.

This leads us to a very important aspect of the mortgage process – what are you buying? What type of home? Does it have restrictions such as age? Is it a single family dwelling, strata/condo, mobile or manufactured home or how is it zoned? Many don’t consider these aspects of the financing process but for each property type, different mortgage approaches need to be addressed. Some will limit the length of amortization accessible based on the life expectancy of the home. Or, some will require CMHC (Canadian Mortgage Housing Corporation) insurance. Others will acquire a much higher rate than maybe what was originally placed on the rate hold. The aspect many realtors don’t understand or consider as well is what are the property taxes? Are there strata fees? Any time you add a liability to the debt servicing ratios, these values can adjust the qualifying amount a buyer can afford. Again, when a pre-approval is completed, it has made several assumptions! The bottom line is we, as Brokers or Lenders, do not know what type of home you will buy. We can only make assumptions, and therefore, adjust the pre-approval based on these assumptions. But like any assumption, these can change which can adjust the outcome of financing – either for the better or worse. In order to protect a buyer, we ALWAYS encourage them place a subject clause such as condition to obtaining satisfactory mortgage financing so that we have time to add or take away vital information on the application to complete a thorough review of the mortgage and property details. Thus, when a final approval is obtained, we have done our due diligence for the buyer.

In the end, a pre-approval is still a very important step in the house hunting process. It may not provide a guarantee approval but it does help the buyer to understand their affordability range. It ensures that the Broker or Lender is doing their job by asking questions that are pertinent to the buyer. We need to understand what it is they want or need before addressing mortgage terms or products. A great Broker or Lender will ensure that their comfort ability range has been addressed. It is one thing for a Broker to tell a buyer how much they can afford based on Lender guidelines. It is another for a Broker to address the personal budget of a potential buyer – thus creating a workable baseline for the buyer and for the realtor.

We strive to better ourselves and our clients by taking the time to follow through. We ask these questions and many more to determine what makes the most sense for our clients. Don’t just trust that your Bank has done all of this for you. If you have not supplied any information upfront, then it is safe to say that you have nothing more than a bonafide rate hold. Don’t be afraid to ask questions but please ensure you are asking those questions to the right people. Relying on what others tell you rather than a professional Mortgage Advisor may lead you to a less than desirable outcome.

Build dreams, Open doors.

Kari Gares
Okanagan Power Broker