Pre-approvals are probably the most misunderstood area in mortgages today. This is because the big banks have given clients the impression that they have a mortgage when they essentially only have a rate hold.
As a result of this misconception home seekers have been left with the perception that all they have to do is find a home, put an offer in and the rest is formality. This notion has left many home buyers frustrated when they buy a home just to find out they cannot get the financing for it. What banks call a pre-approval are essentially an interest rate hold for a maximum period of 90 to 120 days.
Here are some reasons why pre-approvals should not be trusted:
- At the time of the rate hold there is no property to review yet. Not all lenders finance all property types in all areas.
- Because there is no property yet, the true value of the property versus its selling price cannot be verified.*
- Pre-approvals are not underwritten – They are most often done electronically based on basic criteria that are not verified at the time of the rate hold.
- If the borrower has less than 20% down payment the mortgage will be insured through CMHC, Genworth or Canada Guaranty. The insurer only sees the application at the time of the actual home purchase, not at the time of the rate hold.
- Income, down payment & closing cost sources or amounts are not verified at the time of the rate hold.
- Pre–approvals are done using much more conservative criteria and are not a true reflection of affordability.
* – If a purchased property is worth less than its actual purchase price (as a result of multiple offers) the lender or mortgage insurer will require the purchaser to come up with the difference in value in cash additional to their down payment.
If a client submitted a “firm” (waived the finance and other conditions) offer of purchase and they cannot generate additional funds to cover the difference in value they will lose their deposit that they surrendered at the time of the offer.
If, however, the client secured a financing clause in the offer they can abandon the purchase and get their deposit back without recourse. THUS, IT IS NOT IN THE BEST INTEREST OF THE PURCHASER TO GO FIRM WHEN AN OFFER IS PRESENTED.
As your mortgage agent in Oakville we pre-qualify you. A pre-qualification truly prepares you for home ownership. We will cover the pre-qualification process in the next article.
If you’ve got questions about your mortgage, get in touch with us!
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