Exploring the mortgage pre-approval process

Going through the pre-approval process is more important than ever to both you and your realtor, but the actual term ‘pre-approval’ is potentially misleading.

You may be pre-approved for a certain mortgage amount, however there are still a number of variables that can enter the picture once an offer is accepted.

That’s why it is imperative that one always includes a clause in the offer along the lines of ‘subject to receiving and approving financing.’

(There are variations to be discussed around the specific wording.)

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

An understandable desire.

The risk, though, is that some may falsely believe that they have a guarantee of financing. They don’t.

A lender must review all related documents – not just those of the clients, but also those from the appraiser and the realtor – as the property itself must meet certain standards and guidelines.

The pre-approval process should be considered a pre-screening – a first step only.

It does involve review and analysis of the client’s current credit report; 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 important: with the completed application your broker is able to lock in rates for up to 120 days.

Why won’t a lender fully review and underwrite a pre-approval? Lenders do not have the staff resources to review ‘maybe’ applications – they have a hard enough time keeping up with ‘live’ transactions.

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 If more than four weeks pass, all of the documents are out of date – by lender standards – and a fresh batch needs to be ordered and reviewed. The conversion rate of pre-approvals to ‘live transactions’ is less than 10%.

It is this last point that makes it so difficult to get an underwriter to completely review a pre-approval application as a special exception.

The bottom line is that a client’s best bet for confidence is the educated and experienced opinion of the front-line individual with whom they are directly speaking – and that’s their mortgage broker.

This individual will not be the same person who underwrites and formally approves the live transaction when the time comes.

This disconnect between intake of application and actual underwriting of a live file makes having a ‘subject to receiving and approving financing’ clause in the purchase sale agreement so very important.

Perhaps the most significant factor in undermining the solidity of a client’s preapproval is the relentless pace of change of lending guidelines and policies – changes implemented not only by the federal government but also by the lenders themselves.

It is very easy to have a pre-approval for a certain mortgage amount rendered meaningless just a few days later through changes to internal underwriting guidelines.

Often these changes arrive with no warning and existing pre-approvals are not grandfathered.

It is absolutely worthwhile going through the pre-approval process before writing offers, and in particular before listing your current property for sale or accepting offers.

This will give you a good idea of your maximum mortgage amount as well as securing a rate for you. It is a worthwhile endeavour.

Just be aware that aside from the key advantage of catching small issues early and securing rates, a pre-approval is not a 100% guarantee of financing.

But the good thing is, I can help you with this process!

Jean-Guy Turcotte is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.

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