Pre-Approvals and What You Need to Know About Them

It is a common knowledge that you need to get yourself pre-approved for a mortgage before starting to look for a home.

But what exactly is a pre-approval and to what extent does it guarantee you an actual approval once your find a property? It all depends on what kind of work is done during the pre-approval analysis.

A typical pre-approval is a certificate given to a future home buyer by a lender, stating that they have been pre-approved for a certain amount of mortgage, at a certain rate, held for a specific period of time (typically 4 months). The very same document also states, in somewhat smaller wording, that the pre-approval is subject to satisfactory income confirmation, credit history, down payment and potentially an appraisal…

Well, if it is conditional to all these things, how can you ensure that all these conditions will be satisfied once you find the property, especially if you have to make an offer that is firm, i.e. unconditional on financing? And as we all know, unconditional offers are commonplace in today’s real estate market.

It’s unfortunate, but the reality is that most pre-approvals do not provide a detailed analysis of the clients’ financial situation, and therefore offer no guarantee in securing financing at the actual time of closing.

Very often, a pre-approval is auto-approved by the lender’s approval system, if certain criteria are satisfied. For example, if qualifying ratios are in line and if the credit score is above the minimum required, you can get a pre-approval document within a few seconds.

In situations where the pre-approval is looked at by an actual person, very often the supporting documents are not reviewed or analyzed.  The information is again simply input into a system that generates the pre-approval that the underwriter will send you.

Why does all this matter?  Well, because it means that, without proper analysis, a system generated pre-approval becomes nothing more than a rate hold.

Brokers and lenders often use pre-approvals as a rate hold tool, to guarantee you a mortgage rate in a rising rate environment and rightfully so. But will the actual certificate guarantee you an approval once you find the property? No. Not unless a proper analysis has been done…

So, to secure yourself peace of mind, what should be done at a pre-approval stage?

All critical elements of application should be reviewed up-front… Income, down payment, and credit history.

For income, your broker or banker should get your letter of employment and ensure that you are a full-time, permanent employee who makes a guaranteed income. If your income varies, if you are part-time or receive bonus or overtime, the broker should be asking for T4’s and using proper averages as qualifying income. The mortgage professional should also be checking your paystubs to ensure you are pacing year-to-date towards the income that you are using.

For self-employed individuals, “T1 Generals” should be reviewed in detail to ensure income is consistent year-over-year.

When it comes to the down-payment, be prepared to be  asked for the source of the funds… Is it savings, RSPs, or gift from immediate family? Loans and gifts from friends are typically not allowed so that should be discussed too. Any large deposits to your account over the past 90 days will raise questions by the bank, so it’s better to discuss this sooner versus later.

Credit should also be reviewed in detail. Do you have a good credit score but relatively new credit? Is there any debt that you thought it was paid off but it still shows on the credit bureau report? Is there something that is lowering your credit score but could be fixed by a simple adjustment? Those are things that your mortgage professional should review and discuss with you.

A proper pre-approval is not a certificate given to you by a bank or a broker. It is a detailed analysis of all aspects of the mortgage application. It’s crunching numbers based on proper supporting documents. It’s asking the proper, and sometimes, tough questions up-front, before you spend your and your realtor’s time searching for a property that you may not even qualify for. A pre-approval does the work up front to ensure there are no surprises down the road.

And, if you after all this analysis, you still want to get a pre-approval certificate so that you feel better about it and so that your realtor confirms you’re a serious buyer, then we can get you that too…

Happy Buying!!