When you hear the word pre-approval? What is the first interpretation that comes to your mind?
If you are like most buyers, you take this as gospel and start shopping to find your dream home. The bank has given you the green light and you will have immediate access to the mortgage funds upon closing because they gave you a pre-approval. Right?
But what if I told you, that the pre-approval is on shaky grounds?
I recently earned my licence to trade in mortgages and once I found this out about pre-approvals, my whole mindset changed for where I am referring my clients to get their pre-approval complete from a lender.
So let's get into the different types of "pre-approval" that are out there and why it's important, especially if you are wanting to buy in a highly competitive market.
Most Major Bank Approvals
When you visit your bank to get a pre-approval from the bank, it's probably much easier to do than say getting a pre-approval from a monoline lender via a broker.
No one ever wants to go to the bank, so they want to keep the process as easy as possible for the client.
They have access to your banking records (which a mortgage broker will need you to provide) and are able to access your income, credit, etc. on the spot and hand you a pre-approved amount with a rate hold for a certain amount of time.
This keeps it easy in the beginning, but can be difficult on the back end when you finally find the property you want to submit an offer on.
Why you might ask? Because once you find the property is when the major banks will do the work needed to approve the borrower as well as the property for funding.
This is why most banks will need as much time as possible for a financing condition in place so that they can evaluate the property.
Easy on the front end, stressful on the backend. Not something I particularly like my buyer clients to go through for a couple of reasons:
Inserting a long condition period, especially in our market lately, weakens the offer they are able to present.
Usually, buyers want to schedule an inspection after financing is complete so that they don't waste their money on an inspection in case the funding doesn't go through.
But most banks will want to make sure your financing condition is in place as long as possible so they can complete their due diligence. Which they need to do and have every right since they are funding the mortgage.
But what if you did half the work upfront to make sure you were qualified for the home so that when you write the offer, the lender's only concern is ensuring the property is fundable?
I'm sure you would prefer the latter. Which we will dive into now.
Some Banks, Most Brokers
When I first get a referral for a client looking to purchase a home, my first step is to speak to them to understand their goals, where they are in the process, and ultimately start to guide them to the goal of purchasing a property.
Part of that conversation now is around getting a proper pre-approval done for them either through myself or by my referral mortgage partners.
When I say proper, I mean that the bank rep or mortgage broker has spoken to you, requested documents like a job letter, T4 slips, notices of assessments for taxes, etc. They review these documents, along with bank statements, to ensure there are no gaps for the lender to see.
This is critical because before writing an offer, you want to have the confidence to know you are 100% qualified for the amount being funded for the purchase. The lender just needs to verify the property is also qualified for the funds. Some things that might not make the property fundable from a lender's eye can include:
Lack of insurance
and the list goes on. It's much better to have all your income and liability verification complete before the property comes into the picture so that the lender can focus on the property. This can potentially help to:
Reduce financing conditions time to allow due diligence with inspections
Provide a less stressful environment for you to make sound decisions about your purchase.
When all the documentation is provided upfront, the bank rep or mortgage broker can confidently tell you what you can be approved for and what you need to keep your expenses like property taxes or condo fees below.
They can also provide all these documents along with your application to the lender prior to you stepping into a home to view to have a commitment letter back from them outlining some other conditions they will want you to confirm.
I can tell you stories of clients that haven't had this done beforehand and were waiting to remove conditions because a bank wanted to review one more of their income documents.
I recently did a mortgage with my team leader who submitted the file to the lender and they responded within 24 hours with a commitment letter for our client. Yes, the work was done on the front end to ensure the documents were in place and the lender was up to date on the circumstance.
But 24 hours is not too bad!
Becoming licenced in the mortgage industry has really helped me to better serve my clients. And although there are still some that prefer the convenience of a traditional big bank, having them armed with the knowledge of how the process might go is important. There are some big banks that do this work upfront and others that don't.
However, those that are wanting to take advantage of the market and stay ahead of any issues that arise are the ones that are open to speaking to me or my referral banks and mortgage partners about having a true pre-approval done so that they are able to get into the home they want with ease and as a little headache as possible.
Thanks for your time checking out my first mortgage update. I hope this was useful for you. If you have any comments or suggestions on how I can improve these pieces, please send me an email below to connect with me on social media by clicking HERE. I'd love to hear from you.
Have a great day ahead.