This topic is often brought up on various online forums and opinions vary, from don’t bother it’s not worth the paper it’s written on to it’s a must and everything in between.
Most home buyers are not lucky enough to be purchasing a property without financing and will need a mortgage. Let’s start with the basics.
What is mortgage pre-approval.
A mortgage pre-approval means the financial institution has qualified you for a certain amount of mortgage based on your financial position. The pre-approval process will take anywhere between few days and few weeks and the lender or the mortgage broker will request documents such as government id, details of debts including monthly payments, proof of income such as paystubs, notices of assessments, employment history or employment letter, proof of assets, proof of down payment, authorization to perform the credit check etc. The lender will perform a hard check and typically guarantee the rate between 60 to 130 days.
Pre-approval v pre-qualification.
Pre-qualification is simply providing the lender or a broker the information, pre-approval holds more weight because the lender or broker is verifying this information.
When to get the mortgage pre-approval.
The mortgage pre-approval should be obtained before you hire your realtor and start house hunting. As the pre-approvals expire, they should be fairly recent.
The benefits of the mortgage pre-approval.
By obtaining the mortgage pre-approval you will know the maximum purchase price of the properties you can buy. Just because you are approved for a certain amount doesn’t mean you need to spend it, in many cases you will be spending much less, but you will know the maximum and won’t be wasting time looking at properties that are not within your budget or max approval range.
You may be taken more seriously by the sellers.
It will give you more confidence when shopping for properties.
Your rate may be guaranteed.
Do the pre-approvals guarantee the mortgage.
No, they don’t.
The pre-approval is based on the current financial situation, and it’s not based on a particular property, so if the financials situation changes or the property you are interested in has challenges, the mortgage may not be issued.
The examples of changes in the financial position that will affect the borrowing power are loss of employment, change of employment, switching from employee position to self employed, financing a new car, getting a new loan, credit card or line of credit, rack up credit card balances.
The examples of the type of property that would affect the financing would be any property with issues, former grow up, rural property that is difficult to assess value, micro condo under 500 sf, condos that are part hotel, condos with poor status certificate, property with environmental restrictions, log homes, heritage destination homes and so on.
How we work.
During the initial interview with the buyers, we ask if you are pre-approved for a mortgage. We don’t ask for a proof we just want to know if are pre-approved. If yes great we simply want to confirm that the amount you are hoping to spend is within the pre-approval bracket, if not we ask you to get the pre-approval and are happy to recommend mortgage brokers we have worked with in the past who provide great service.
In our opinion the pre-approval is very important for the reasons already mentioned above. We have had cases where the people were pre-approved for much higher amounts than they have anticipated, but also where they were approved for much lower than they thought they would be approved for. In such instances imaging shopping for homes and buying something that you are not able to finance.
Once the property of interest is identified and the buyers are interested in buying it, we send the detailed info regarding this particular property to the mortgage broker. When in the balanced market or buyers market there would likely be a financing condition which is usually satisfied with 5 or so days after the conditional agreement of purchase and sale has been signed.
Around GTA, and so is the case currently, we are in the sellers’ market, buyers are often competing with other buyers and there are multiple offers on many properties, quite often offers with conditions are ignored, and in order to purchase the property the buyers put in offers without any conditions, that includes financing. In these cases, we consult the mortgage brokers regarding this particular property, ask them if this particular buyer can or can’t make an offer without financing and up to what amount, if we get a green light from the mortgage broker we consider doing so. So far, when following this formula, we haven’t had even one buyer declined the mortgage or had issues with financing, it’s as close to satisfying the financing condition without putting the financing condition, as it gets. This wouldn’t be possible without obtaining the pre-approval first. We do have to have to keep in mind that the mortgage is not guaranteed.
What do experts say.
As mentioned above have seen many opinions online stating that the pre-approvals are not important, and we disagree. Let’s see what the experts have to say about this from major banks such as Royal Bank, BMO , Bank of Nova Scotia, large mortgage brokers such as Nesto and Ratehub, and even the Government of Canada. Please click on these links, the opinion is pretty much the same across the board, the mortgage pre-approval is a very important first step in purchasing the real estate.
Please don’t hesitate to contact us if you have any questions.
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