Are we Pre-Approved? Not what you might think it means…

Many clients think that having a mortgage pre approval puts them in a position to write offers on properties without inserting a ‘condition to receiving and approving financing’ clause.

Nothing could be further from the truth.

Being ‘pre-approved’ can all too easily create a false sense of security.

Although going through the pre-approval process is itself important the actual term ‘pre-approval’ is not exactly accurate.  In fact it should at the very least be called a ‘conditional pre approval’ or more accurately still a ‘rate hold’.

Here is a typical lender response following submission of a file for Pre-Approval;

"Thank you for choosing TD Canada Trust, please note that a rate hold only has been approved at this time. The Rate of X.XX% with a term of X years has been processed. Once clients have a valid signed purchase and sale agreement in place, please resubmit for full credit adjudication and decision. Rate will be held for 120 days. Current credit bureaus will be required at time of re-submission."

An important point to be clear on is although you may be pre-approved at a certain rate (which is typically held for 120 days from the date of application), not much else other than this rate has any degree of certainty.   There remain a number of conditions to be met as well as variables which can enter into the equation when you actually write an offer on a specific property and as such it is imperative that one always includes a condition clause in their offer along the lines of ‘subject to receiving and approving financing’.

Often clients are reluctant to write an offer on a property without feeling that they are 100% pre-approved.  Although this is an understandable desire,  and in some cases clients may be led to believe that this is the case by their lenders, the fact remains that until the lender reviews all related documents not just those that come from the client but also those that come from the appraiser and the Realtor, there is no 100% certainty of approval.

This would be why we always try to insist that clients include, arguably the single most important condition clause in their Offer to Purchase ‘subject to receiving and approving financing’. (I am being repetitive with this statement for a reason)

The preapproval process should be considered more of a pre-screening process than anything. It should always involve review and analysis of the client's current credit report, it should also include a list for the client of all documents that will be required in the event that an offer is written and accepted, (ideally all of those documents should be reviewed and approved by your mortgage broker in advance of the offer being written). Clients should also come away from this process with a clear understanding of the maximum mortgage amount they qualify for along with the various related costs involved in their specific real estate transaction. In the Province of Ontario, the Land Transfer Tax is an important one.  Equally as important; with the completed application, the broker is able to lock in rates for up to 120 days. One specific advantage of an independent Mortgage Broker being that your rate can be locked in with a few different lenders giving you a safety net of one lender has an issue with the property, perhaps over an illegal suite, restrictive covenant, etc.

Why is the lender not fully underwriting my application?

With the Banks, Credit Unions, etc. the actual conversion rate of pre-approvals to ‘actual mortgages is less than 10%.  It is for this reason that an actual live underwriter very rarely completely reviews a pre-approval application.  It is not an efficient use of resources.  Therefore the bottom line is that the client is really only getting the opinion of the front-line individual with whom they are directly speaking. That individual will not be the same person that underwrites and approves the actual transaction. This is true of every mainstream "A" lender channel that I can think of.

It is due to this disconnect between intake of application and actual underwriting of a live application that the ‘subject to receiving and approving financing’ clause in the purchase/sale agreement is so vital.

Another significant factor which over the past four years, and in particular since Nov 1st, 2016  has undermined the solidity of a client pre-approval is the relentless pace of change with regard to lending guidelines and policies implemented not only by the Federal Government, OFSI, but also by the lenders themselves.  In other words it is very easy to walk out of a lenders with a pre-approval for a certain mortgage amount only to have it rendered meaningless a few days later when the banks change internal underwriting guidelines with no warning and very little notice to the general public.

Setting aside these concerns there still exists the general concept that although the client may have excellent credit, an excellent job, and a strong down payment –the bank still needs to approve of the property which the clients wish to purchase.  Is it on lease land, is it an age restricted building, was there a significant special assessment within the previous five years, have there been building envelope issues, is the property it remediated former marijuana grow-op, is the ‘economic life’ of the dwelling too short to meet lender guidelines, is the property subject to a current rezoning or development application, is the home in a floodplain, is it sitting on a log foundation, the list goes on.

This is perhaps the simplest point I can make – perhaps you the client are ‘pre-approved’ but most certainly the subject property is not – and there are several properties that a lender will not touch these days.

Take nobodies word that you are pre-approved, look for an email from your broker stating ‘File Complete’ which should arrive no later than your condition removal date ideally.
Written by Dustan Woodhouse. 

Posted and edited to reflect mortgage lending in Ontario by Steven Porter, Mortgage Agent, Mortgage Architects. Steven can be reached at 905-875-2582 or by email at Steven@1800Mortgages.ca

Prequalified or Pre-Approved for a Mortgage? The Shocking Facts

The first words of advice you'll hear when beginning your search as a homebuyer are "get prequalified or pre-approved  for a mortgage." The misleading fact about these two terms is that they are not interchangeable. 

When I actively practiced real estate brokerage, many times the terms Prequalify and Pre-Approval were brought up in the same breath by many lenders and so-called real estate industry experts. That meant they were the same thing to many real estate agents who in-turn advised their clients accordingly. 

After leaving real estate sales and entering a career in mortgage lending with one of the major banks, I LEARNED A SHOCKING TRUTH. Although Banks typically tell consumers and Realtors that they do mortgage Pre-Approvals, the fact of the matter is THEY DO NOT! At the very most, the bank will prequalify a potential borrower (depending who you're face to face with) and provide a rate hold certificate. Unfortunately, it's not worth more than the paper it's printed on. 

What does that certificate mean to you, the homebuyer? "Absolutely nothing." Buying a house armed with your new certificate and falsely thinking to yourself you have the mortgage in your back pocket is truly nothing short of betting on a craps shoot. 

"So what is the difference between a Prequalification and a proper mortgage Pre-Approval?" First, it depends on whose doing a prequalification for you. My experience with the bank was if you've got a down payment, a job and a pulse you're prequalified. Here's you guaranteed rate certificate. "What are your really getting?" The bank's current mortgage rate for the next "X" number of days, subject to: "read the fine print below", income and employment verification, down payment confirmation, credit history, etc. etc. Remember banks work for the banks. So, if you come back a month later with your Agreement of Purchase and Sale in hand (by the way this is only when most banks will run the numbers for you) and you don't qualify, you don't get the mortgage. "Next".

Admittedly, very few lenders provide mortgage Pre-Approvals. The process actually involves the lenders underwriter going through the same motions as if you had actually bought a home and applied for a mortgage. Income and employment are confirmed, downpayment, credit history and debt service ratios reviewed, etc. If everything meets the lender's approval. Then, essentially the lender ear-marks the mortgage funds for the prospective borrower to be advanced upon the purchase and closing of a home. With this type of mortgage Pre-Approval, the borrower is pretty much assured he is going to get a mortgage usually subject an appraisal. There is a cost to lenders preforming a mortgage pre-approval. The lender absorbs these costs on the expectation of receiving the future business. However, like many things, due to abuse lenders limit the use of this service typically to preferred brokers. 

There is a common misconception among homebuyers and real estate salespeople that once you're pre-approved for a mortgage, you don't need a "Condition of Mortgage Financing Approval" in your Offer to Purchase. A Pre-Approval does not guarantee you're going to get a mortgage, especially if you've only been prequalified without the benefit of supporting information. There are many variables the lender needs to consider approving you for a mortgage after you've made an offer. Things like the house itself, location, appraised value, etc. 

Congratulations! You were in a multiple offer on a property and you won the bidding. You only paid $10,000. over asking and that's still in the range you were Pre-Approved for. SURPRISE! The appraiser estimates the property is valued $10,000. under what you offered and the lender will only lend against the appraised value. So unless you've got the extra money under you mattress, you're not going to be able to close the deal. My advice to you is include a condition in your offer to purchase subject to you obtaining a mortgage. 

"How long do I need for a condition of finance in my offer?" Good question. This period can vary and is reflective of how well you've completed your mortgage shopping due diligence prior to shopping for a home. For example, the time typically allotted for satisfying a condition of financing approval in an offer is 5 banking days. As a homebuyer, if you have not met with a mortgage planner before to making an offer on a home, that means the broker and the lender only have five days in which to obtain all your necessary supporting documents from you including employment letters, pay statements, tax documents, contracts, appraisal, etc. If you happen to be self-employed the list is even larger and five days may not be enough time to obtain and review everything. Not to mention, if you didn't do your proper due diligence and  your financing is not approved, the seller and the sellers agent won't be impressed and will most likely loose confidence in your real estate agent for not ensuring you did your homework. Compare this scenario if you had gone the Pre-Approval route. You would have already submitted all your documents to the lender through your mortgage broker. Therefore the lenders conditions of mortgage approval would typically be limited to the review of the Agreement of Purchase and Sale, an appraisal of the property if required and approval by the mortgage insurer if it is an insured mortgage. The turn-around for approval in this case could be as quick as 24 hours.

The take-away here is "Buyer Beware". Do your due diligence and plan your home purchase. Start first by sitting with a licensed mortgage broker/agent. They work for you. Ask about the benefits of a proper Mortgage Pre-Approval. At the very least, provide all the necessary documents to your Broker/Agent and have him properly prequalify you. Ask him whether or not you need to include and condition of financing approval in an offer to purchase a home. Ask Why or Why Not? 

Armed with your Pre-Approval Certificate or at least, the confidence of being properly prequalified for a mortgage, find a good real estate agent that actively works in the area you wish to buy in. Better still, if you don't know a good Realtor, ask your mortgage broker/agent for a recommendation. Mortgage Brokers/Agents regularly work together with Realtors and are more than happy to refer you to two or three good Realtors they have successfully done business with in the past.

Visit http://www.stevenporter.ca/solutions/ShoppingAids and download my easy Mortgage Checklist to begin your home search. Or email me, I'm always available to answer your questions. 

Steven Porter, CRMS ABR SRES CNE is a licensed Mortgage Agent with the Mortgage Architects. Steven is also a licensed, non-selling real estate broker, Accredited Buyer Representative and Seniors Real Estate Specialist with 30 years residential, commercial and investment  real estate experience. Steven works with together with Realtors across the west GTA in a noncompeting capacity, assisting customers and clients achieve financial independence through home ownership. Steven can be reached at 1-905-875-2582 or EMail at steven.porter@mtgarc.ca