Whether you are a first–time homebuyer, or if you have been through the process multiple times before, buying a new home can be an exciting time! Regardless of your experience level, the first step in the process will be to reach out to a mortgage professional to get preapproved. This can be done through a mortgage broker, or through a bank. A mortgage preapproval is an estimate of what you can expect to qualify for. It can also be used to lock in a mortgage rate.
What Exactly Does A Preapproval Mean?
From the sound of it, a preapproval means that you are approved for your mortgage prior to purchasing your new home.
But are you ‘really’ approved?
If the broker or bank is doing their job, they’ll complete a mortgage application, credit check, and collect supporting documentation to back up the information stated on the application.
However, mortgage preapprovals are generally not underwritten by mortgage lenders, or if they are, it’s just a quick review of the application and credit bureau. They may or may not review your documentation at this stage, and if they do, they are not scrutinized in the same way they would if you already had an accepted offer on a property.
While they are usually fairly accurate, they are by no means firm approvals. A mortgage lender does not have any legal obligation to stand by the pre-approval. If not done correctly, they are really not worth the paper they are written on. Often, they are not much more than rate holds.
How I Almost Learned The Hard Way
A few years before I entered the mortgage business, I contacted one of the big banks to see if I could get approved for a mortgage. I was coming off a rough patch in life, so my credit was ‘questionable’, and I had a significant amount of debt. Either way, I thought that it would be worth checking to see if I would be eligible to purchase a home. My dream!
After several days, and multiple follow ups with no word from the bank, I finally heard back from someone. “Congratulations, you’re approved for a mortgage of $320,000!” They even mailed me out a preapproval letter confirming the amount.
I couldn’t have been happier!
But then the logical side of my brain kicked in and I started asking questions. It turns out, they never checked my credit, nor did they even ask me about my debt! When I questioned it, they told me to go out shopping for a home, and once I have an accepted offer in place, come back to them and they’ll check the credit at that time. I did not feel comfortable with this considering I knew I had past credit issues, and my debt was fairly high in relation to my income. Reluctantly, they checked. After a few more days, and multiple unanswered follow ups from my end, I was finally told that I was declined.
While there are some pretty bad mortgage ‘professionals’ out there on both the bank, and the broker side, it would take the worst of the worst to send someone out shopping without so much as asking about debt or checking credit. Not to mention, issuing a preapproval letter!
As nine out of ten pre-approvals don’t go anywhere for the bank or the broker, there are many who simply do not take the time to give them the attention they deserve.
In many cases, a written mortgage preapproval by itself is not worth the paper it’s written on.
Mortgage Preapproval vs. Mortgage Prequalfication
A mortgage preapproval is generally issued directly by a lender. Just because it is coming from a lender, it does not have any more meaning than a prequalification. A preapproval letter is often issued with no underwriting by the lender, and is based solely on the information provided on the application without any verification.
Mortgage preapprovals generally involve locking in a rate for 120 days. This means that your purchase would need to close within the 120 day rate hold period. If the closing occurs outside this window, then your rate would get reset to the going rate with that lender at the time. The rate hold is the only part of the mortgage preapproval that a lender needs to honour… as long as you qualify when it comes down to underwriting your file once you purchase.
Most lenders do not offer preapprovals at all, and will only consider your application once you have a purchase agreement in place. Of the lenders that do, it’s usually not the lowest rate that gets locked in. No additional discounts. The rate that gets locked is often around 0.20% higher than what you can get once you have an accepted offer on a property. Either with that lender, or with another.
As mortgage preapprovals are not really approvals at all, a prequalification is more of an accurate term. This is what the mortgage industry should be using for all preapprovals across the board. However, the word ‘preapproval’ is still preferred my most, despite its misleading context.
After all, you are being ‘prequalified’, but you are not technically being ‘approved’ for anything.
A prequalification does not get sent through to a lender’s underwriting department. It’s generally done at broker level, and does not go beyond at this stage. It does not have any less value then the preapproval because it is not submitted through to a lender. With both preapprovals and prequalification, it really depends on the accuracy of the application submitted, as well as to what level the documentation was reviewed. Both preapprovals and prequalifications can be issued with a full document package, or without any documents provided at all. One does not carry any more weight than the other. It really comes down to the person that is doing the prequalification or preapproval for you.
How To Ensure Your Prequalification is Solid
The person you choose to handle your mortgage for you should be an extremely important decision. A mortgage is a huge financial decision, so you don’t want to trust it to just anyone. It doesn’t matter if you are working with a broker or with the bank directly, always take the time to ask a lot of questions about the person’s qualifications before choosing to trust your mortgage to that person. There is a lot of incompetency in this industry unfortunately, and that applies to both the bank and the broker side. You’re putting a lot of your hard–earned money on the line when you put down your deposit.
As long as you are working with a seasoned broker or bank mortgage specialist, you shouldn’t have any issues with the accuracy of your mortgage prequalification.
My team and I aim to treat our clients the same as we would our own family. We want to ensure that you have a great experience with your mortgage from start to finish. We’re always going to take the time to get all your documents up front, adequately review them, and ensure you’re as solid as possible before we send you out shopping for your new home.
Always Include A Finance Condition
Regardless of how much work is done at the preapproval stage, we always recommend including a finance condition with any offer you make. This means that your offer will be conditional on financing. If the financing does not come through for any reason, you can back out of the deal. Finance conditions are usually for five business days, but they can be longer or shorter, depending on the situation. This gives your broker enough time to submit your file through to the lender for approval, and get it fully underwritten by the lender to ensure everything runs smoothly for you.
If we do your preapproval or prequalification for you, then you shouldn’t have anything to worry about. But there are always things that can pop up that we may not have been aware of. In some cases, it could be the property that gets declined, not the applicant. Always include a finance condition wherever possible to be on the safe side.
There may be situations in a competitive market where you may need to put in a condition-free offer. If you are up against other bidders on the property, then including a finance condition will make your offer less attractive to the seller. This could mean the difference between your offer being accepted, or being passed over in favour of a condition-free offer. Sometimes the winning offer might even be lower than yours, and may have been preferred by the seller as it was free of conditions.
If you find yourself in a position where your realtor feels that you will need to put in an offer without any conditions if you are to be successful in your bid, we’ll take the time to scrutinize all your application and documents a second time. We’ll want to ensure we have a full and complete document package in place, so we can ensure everything looks as solid as possible before putting giving you the green light to remove your finance condition from your offer.
The Worst Mistake You Can Make
Never assume you will qualify for a mortgage. There are many moving parts with mortgages, and sometimes the industry seemingly defies logic or common sense. It does not matter how much money you have in the bank, nor does it matter how much your corporation earns. It’s personal income that is always considered. Always check with a bank or a broker to get prequalified prior to purchasing a property, regardless of how solid you think you may appear on paper.
Sometimes surprises can pop up on your credit bureau. It happens. You may think you have solid credit, and you likely do, but there are times when collections can pop up that you may have been unaware of. It could be from an old account that you thought you closed. Or it could be from fraudulent activity. Either way, ensure you reach out to a mortgage professional and go through the process to ensure everything is solid.