The government has made a number of changes to the mortgage rules over the past few years which have made a significant impact to the mortgage market landscape. I have found one of the major implications of these changes is that it reduces the number of people who can actually qualify for a mortgage now versus the numbers from 5 years ago. It is important now more than ever to get pre-approved.
A mortgage pre-approval is when a mortgage professional will submit your financial application along with your current credit report to a lender for review, prior to you making an offer to purchase a home. The lender will advise if you are pre-approved and can buy up to a specific purchase price depending on the amount of annual property taxes and condo fees if applicable. A pre-approval is not a binding commitment, but rather an indication that the lender is prepared to offer you mortgage financing once a suitable property has been found and your application details have been confirmed by supporting documents. It is important to note that even if you do receive a pre-approved, a “condition to financing” clause should be part of any offer you make.
A mortgage pre-approval differs from a mortgage rate-hold in that the lender actually looks at the details of your application, whereas a rate-hold is just that, a rate-hold without any examination of your qualifying details. Not all lenders these days will take the time to offer more than a rate-hold so make sure you know exactly where you stand financially prior to staring the home shopping process.
The mortgage professional will ask you to complete a mortgage application form as well as to advise of the purchase price range and property type you have in mind (i.e. house, condo or acreage). The purchase price may change as you start property shopping, though it’s important to establish a maximum price range so you won’t be disappointed. The mortgage lender will then review your application details that include credit score and repayment history, downpayment sources and depending on your employment type, they may ask for initial documentation to confirm income amounts. If you are not being qualified at the purchase price you want, ask your mortgage professional if any changes to your finances could be made to allow you to qualify for a higher mortgage amount. The mortgage pre-approval process usually takes 1-3 days.
Most mortgage professionals are happy to obtain a pre-approval on your behalf as it not only provides you with a price range to shop in, it also allows you to familiarize yourself with what the mortgage payments will be at the different purchase prices. Your mortgage professional will also be able to provide you with a list of supporting documents your lender will request once you do find a property. This should get you started on document collection to make the rest of the mortgage and home buying process go smoothly.
A Pre-Approval is not a Mortgage Approval Guarantee
A mortgage pre-approval is pretty much determined by a borrower’s credit, income, assets and debts. While you may have a mortgage “pre- approval”, it does not guarantee an unconditional “approval” once you find a property you want to buy. The lender may have said yes to your income and credit history, though they still reserve the right to decline the property you choose. There are a variety of reasons why a property may not be acceptable to a lender, including but not limited to; the purchase price is not supported by an appraisal, homes with structural damage, or a home having a feature which may limit the future marketability of the property- such as a being a large farming acreage or a previous grow-op. Basically, a lender does not fully approve your financing until they’ve seen every piece of the puzzle including property features and documents that support the details on the mortgage application you have submitted.
It is also important for you to be aware the approval response may change if there are any material changes to the buyer’s financial picture since the pre-approval was issued. Most importantly if the borrower’s income or downpayment decreases or any personal debts increase. A good idea is to always consult with your mortgage professional before making any changes to your financial situation to determine if they will affect your pre-approval conditions.
No Guarantee Means You Still Need Protection
As the mortgage lender can decline to lend against the property you want to buy or the insurance company declines you and/or the property if you are putting down less than 20% of the purchase price, you need to ensure you are protecting your deposit. This is done by having the lender review the property details along with ALL other application support documents prior to you removing your financing condition. You need to know if there are any issues or concerns with your financing prior to your condition removal date, rather than after.
How Long Do They Last?
Most pre-approvals are usually valid for 90-120 days, after which time the lender may require updated information in order to offer you a new pre-approval at current rates. Keep in mind although the lender has already pre-approved you, they will always reconfirm the details that led to the initial approval decision. If any part of your financial picture has changed- whether it’s credit, income or assets- it is the lenders prerogative to decide not to extend you a mortgage approval.
As a consideration to your realtor and for comfort to you as a buyer, it makes sense to have a pre-approval in place before you spend time looking at homes. Though, if you feel your financial profile is strong enough to not secure a pre-approved mortgage, it may make sense to still have a short chat with a mortgage professional to learn exactly what support documentation will be required and where the interest rates are expected to be for a purchase in the near future.