If you’re like most people, then you are aware that one of the first steps of the home-buying process is to obtain a pre-approval. However, like most people, you might be under the impression that a pre-approval is a bank letting you know that they will provide you with the financing needed to complete your eventual purchase. But did you know that a pre-approval is nothing more than an honor to hold a mortgage rate for a certain period?
When most people seek out a mortgage preapproval and subsequently get “preapproved”, they believe that the bank has provided assurances to allow them to go make a purchase. All the bank is saying to you, is that based on their surface-level review of your application, they have approved your request and will provide you with a rate that is valid for a specific period. This means that you would be protected against any rate increases that the market would experience if the preapproval has not expired. In other words, the rate itself is guaranteed.
What it doesn’t guarantee, is the bank completing the loan process and providing you with the mortgage when the time comes. This is because there will be a requirement for further review of material things such as Income verification, credit checks, and the marketability of the subject property.
When a preapproval is submitted to a bank, the underwriter simply goes off the application (bird’s eye view), without having reviewed the supporting documents. Although a credit check will be provided along with the application, the underwriter will include a condition that requires that the credit profile is maintained (or improved) when the “deal goes live” ß This simply means that you’ve found a property and now require the actual mortgage. Furthermore, at this state, since the underwriter does not know anything about the potential property to be mortgaged, sometimes when the property details come into focus later on, it may become a point of resistance for the bank to give you the final approval.
The point is, a pre-approval is not an actual mortgage commitment and it does not guarantee that the bank will ultimately provide you with the mortgage financing. It will include a variety of conditions that are “subject to approval” and once the subject property is known via the purchase agreement, then a formal review would take place to provide the actual mortgage commitment.
This is why we often reset our client expectations to treat a preapproval as more of a pre-qualification. In this sense, you should view a pre-qualification as a step that gives you an idea of your maximum purchase power under a set of conditions. These conditions include income, credit, downpayment, and a general search area for your home. For example, if your prequalification allows you a maximum purchase price of 900k with a 20% downpayment in the GTA, you’ll know not to put an offer on a property for 1.5 million on a rural property somewhere 6 hours north of the GTA.
Once you find a property that works within your prequalification framework, you simply put an offer on the home (be sure to include a condition of financing). If the offer is accepted, we formally apply for the mortgage by submitting the property details/documents and all other supporting documents. If you have followed your prequalification guidelines, then you have a higher probability of getting approved and should expect to review a mortgage commitment.
I hope the above information makes sense, but to simplify things further, the best way to look at a pre-approval is that it’s a prequalification step. It shows you what you can afford based on all the available information you can provide and support. It is more/less a guide to help you set yourself up for a successful purchase and prevent you from going beyond your financial capabilities.
If you would like to discuss how we can help you narrow your focus and set you up for a successful purchase, give us a call today! 905-455-5005