Are you really pre-approved to go shopping for your home?


In the mortgage world there are typically two ways that you will get "Pre-Approved" for your mortgage. One way gives you the best chance to have a successful approval when you do apply for a full approval. The other way has the potential to set you up for failure and end up being declined when you find your home. 

Quite often lending institutions will do what should be called a "Pre-Qualification" and not a pre-approval. This is when you sit down with the employee and they do a very basic number crunch for you. They will ask you what you make and what your debts currently are. After plugging in a few numbers they will tell you that you are approved for a mortgage of $xxx,xxx and you can go out and put an offer on a property. 

There are major flaws in using this process. Credit is a major component of getting approved. If your lender doesn't do a credit check and discuss your credit with you they have no idea if your credit is good enough to qualify. We have had people come to us "pre-approved" at their branch that legally could not get a mortgage because their credit score was so low. Another issue that a pre-qualification does not address is income discrepancies that can be deal killers. What you make and what we can use are not always the same. More often than not we have to use a lower number to qualify you. If your income is not reviewed during the pre-approval process you may not make enough money to buy that property you are trying to get the mortgage on. These are just a couple of examples but there are other things that can come up which make this process useless to a buyer.

A real pre-approval should involve a full mortgage underwrite by the mortgage professional. There should be a full application taken and credit should always be reviewed. At the very least you should be asked to provide a recent paystub to help confirm your income, but it is even better if you provide a paystub and your letter of employment. We also ask that you bring in your down payment verification so that we can iron out any bumps before we have a real deal to try and get approved with a short time period. The more mortgage specific documentation we can review during the pre-approval process the better chances of getting the real deal approved.

One thing that is very important to note is that even a solid pre-approval does not guarantee you will be approved. Pre-approvals for the most part are not fully underwritten by the lender. They treat them as rate holds and hope that the mortgage professional has done their job. Some lenders do a pretty thorough pre-approval process but there are other factors that come up when it is a real deal. You now have a property that may not be marketable for some reason so the lender does not like it. There is also the X factor of the mortgage insurance providers (CMHC, Genworth and Canada Guaranty). The mortgage insurance providers have the final say on an approval so they may see or know something that the mortgage professional and lender did not. 

We speak with many potential mortgage clients every day. Many times we get the people who were pre-approved but then declined by the same lender when they actually put an offer on the house. We find that in most of these cases, when we run through the deal, it is pretty simple that they should not have been out buying in the first place. Usually a credit or income issue. If you get the pre-approval done properly the first time, the buying process should go much smoother and hopefully stress free. 



This article is in the category: General.


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