Recently the government announced the 6th change to the mortgage rules in eight years. I have seen both positive and negative opinions on how these will affect housing prices, interest rates, and the overall mortgage market landscape. Regardless of the new changes; the housing market is still strong and Canadians will always have a need for real estate. While there is no guarantee of financing, a mortgage pre-approval acts as a proactive approach towards a positive outcome. Here are 7 tips about pre-approvals which will help in taking an educated approach to financing your new home purchase.
- What is a mortgage pre-approval?
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. 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-approval, 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 process
Yourself and the mortgage professional will complete a mortgage application which will include the purchase price range and property type you have in mind (i.e. house, condo or acreage). The mortgage lender will then review your application details which will include your credit report which usually takes 1-3 days for a response. 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.
- What comes after the pre-approval?
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.
- A pre-approval is not a guaranteed mortgage approval
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 may decline you based on 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 important to note that mortgage rules can change at any time and a pre-approval does not exempt the borrower from these changes. What it does do is give the potential borrower an idea of what kind of financing they can get, or it will indicate if a plan B is required. Keep in mind the mortgage lenders 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. Having the lender review the property details along with ALL other application support documents prior to you removing your financing condition is vital. 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. How long your pre-approval and corresponding rate hold is good for is important if rates increase as you will want to close within your pre-approval period in order to keep your pre-approved interest rate.
- The benefits
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 with the new rule changes, it may still make sense to have a chat with your mortgage professional. You will determine exactly what support documentation will be required and where the interest rates are expected to be for a purchase in the near future.
For all your mortgage needs, contact Jackie at 780.433.8412 or firstname.lastname@example.org. Stay in the loop by following on Twitter @Mortgagegirlca.