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Things one should know about a mortgage pre-approval.

Although going through the preapproval process is itself important, the actual term ‘preapproval’ is potentially misleading.

An important point to be clear on is although you may be preapproved for a certain mortgage amount there are still a number of variables that can enter into the equation when you actually write an offer on a property and as such it is imperative that one always includes a subject clause in said written offer along the lines of ‘subject to receiving and approving financing’.

Often clients are reluctant to write the initial offer on a property  without feeling like they are 100% preapproved.

Although that is an understandable desire,  and although some clients may be led to believe that they have such an approval, 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 not a 100% certainty of approval.

This would be why we always try to insist that clients include arguably the single most important clause in their contract ‘subject to receiving and approving financing’.

The preapproval process should be considered more of a prescreening process than anything.   It does involve review and analysis of the clients current credit  report and score, 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, clients should also come away from this initial 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.  Equally as important; with the completed application the broker is able to lock in rates for up to 120 days with a few different lenders.

  But why won’t they just review my job letter, paystub, etc. and confirm that they will lend me the money if I pick the right property?

Here are a few simple reasons why not;

  •  Lenders do not have the staff to review ‘maybe’ applications – they have a hard enough time keeping up with ‘live’ deals.
  • The job you have today may well not be the job you have by the time you write your offer.
  • If more than four weeks pass the documents are out of date and a fresh batch needs to be reviewed.

For the actual lenders, the banks, credit unions, etc. the conversion rate of preapprovals to ‘live deals’ is less than 10%.  It is for this reason that an  underwriter very rarely completely reviews a preapproval application.  In other words a client is really only getting the opinion of the front-line individual with whom they are directly speaking, and that individual will not be the same person that underwrites and approves live transactions.

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

Another significant factor which over the past four years in particular has tended to undermine the solidity of a clients preapproval is the relentless changes in lending guidelines and policies implemented not only by the government also by the banks.  In other words it is very easy to walk out with a preapproval 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. Pre-Approvals are not grandfathered when the lending rules change.

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.  Various issues arise with properties on leased land, age restricted buildings, units that have had a significant special assessment within the previous five years, 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 cinderblock foundation, the list goes on….and on.

So yes, request that pre-approval, it gives you a good idea as to your max mortgage amount and locks down a rate for you.  Always a worthwhile endeavour.  It may also raise s few issues that you have ample time to deal with prior to writing your offer.

Be aware that aside from these key advantages a pre approval is not a guarantee of financing.