A mortgage pre-approval is a useful first step when determining one’s affordability. Its primary focus is the applicant/s income which is used to calculation that maximum mortgage payments that you can carry based on that income. Once a mortgage pre-approval is complete, it can be used as the basis to determine the maximum purchase price of a home that you can go out a buy. In order to do this, you simply take the maximum mortgage payment that is stated on the mortgage pre-approval and add the available funds for the down payment to get the maximum purchase price:
Mortgage Pre-approval = $350,000
Available Funds for down payment = $50,000
Maximum Purchase Price = $350,000 + $50,000 = $400,000
In the above scenario, with a mortgage pre-approval of $350k and a down payment of $50k, the maximum purchase price would therefore be $400k…
Having said that, there is a common misconception where mortgage pre-approvals are concerned. Most clients believe a mortgage pre-approval is a mortgage pre-APPROVAL, and this is simply not true. A more accurate understanding of a mortgage pre-approval would be to consider it as a “prior to an approval” and not an “approval before” making on offer on a home.
The reason pre-approvals are not actual approvals has to do with the fact that there is no actual contract to purchase a home, in place at the time of the mortgage pre-approval stage. Since this is the case, most mortgage lenders will not invest time and resources into reviewing an application fully because without a purchase agreement, the file may not ever proceed to closing on the mortgage. There are many reasons why the file may not go far including an applicant deciding to not purchase anymore, purchasing power is too low, they cannot get a seller to agree to a price within their pre-approval, etc.… (these are just a few)
If you are curious to learn more about mortgage pre-approvals, please feel free to reach out to us and we would be happy to add further clarification – 905.455.5005