Although going through the pre-approval process is important, the actual term ‘pre-approval’ is often misunderstood.
An important point to be clear on is that while you may be pre-approved for a certain mortgage amount, there are several variables that can derail a final approval once you write an offer on a property.
As such it is imperative that offers include a condition (or ‘subject’) clause along the lines of ‘subject to receiving and approving satisfactory financing’.
This is arguably the single most important clause in a contract (an inspection being a close second), because without the financing, how will you complete your purchase?
The pre-approval process should be considered more of a personal pre-screening process than anything.
It should include a lender review of a current credit report and review of all required income and down payment documents.
You should have a clear understanding of the maximum mortgage amount you qualify for along with clarity on the various related costs involved in your specific transaction.
With most lenders pre-approvals involve no formal live review of documents, but your mortgage broker can preview them to catch any significant areas of concern such as:
• unfiled taxes
• unpaid taxes
• employment still in a probationary period
• clarity around down payment origins
Ultimately the property forms are a significant part of a mortgage approval, and so until an offer is written on a specific property, no true approval can be offered.
Also, if you require mortgage insurance, CMHC, Genworth, and Canada Guaranty do not pre-approve applications. So even though you have a pre-approval comfort letter from a lender but you require mortgage insurance then you may have to find alternative solutions.
Furthermore, government changes to lending guidelines and policies can render a pre-approval invalid just a few days later, without warning.
Pre-Approvals are not always grandfathered when the lending rules change.
So yes, request a pre-approval, as it gives you a good idea as to your maximum mortgage amount and locks down a rate for you – always a worthwhile endeavour.
It may also allow you to address a few smaller issues with ample time prior to writing your offer. Small issues today can be big issues when in the middle of a live transaction.
Bottom line, please be aware that aside from these key advantages, a pre-approval is not a guarantee of mortgage financing.
Jean-Guy Turcotte is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.