You hear the terminology ‘pre-approval’ often, but do you know exactly what it entails? One of the biggest misconceptions is that a pre-approval commitment from a lender is a guarantee of financing…it is simply just a rate hold. If you read the fine print, everything is conditional on you and your property qualifying. The lender reviews limited documentation at the pre-approval stage, usually it is just your credit score.
The key difference in getting a more substantial pre-approval is the level of review done by the agent submitting the pre-approval for you. A good mortgage broker would be asking more questions, requesting documents from you and discussing your goals. The purpose of doing this work upfront is beneficial on many levels.
Firstly, you are forced to find your documentation sooner rather than later and avoid very stressful timelines when the deal is live and you have a financing condition. Do you want to burn days just searching for your documents or finding out that the ones you thought were suitable were not? Secondly, the information from the documents is more accurate and your mortgage broker can assure you more of the likelihood of getting approved.
Lastly, with proper discussion of your goals, your mortgage broker can truly get you pre-approved with the lender and product RIGHT FOR YOU. What is the point of getting a rate hold when the product is not a good fit for you? A pre-approval is not binding therefore you have the option of not committing with a real deal. The pre-approval can expire, for example, this happens to clients who didn’t expected to take that long searching for a property. Pre-approval rate holds can be from 30 days up to 6 months (some lenders specialize in even longer holds), a common length is 120 days. To be eligible for your pre-approved rate you must close before the pre-approval commitment expiry date. Most lenders have a policy that if their rate drops during your rate hold, you would be eligible for that lower rate, your broker would request this on your behalf.
The biggest value from a pre-approval is getting the assurance (note, this is not a guarantee until the deal is real and your documents are reviewed by lender) that you can actually qualify for a mortgage and, if any, what are your issues and limitations. This will give you more confidence when looking for your property.
Some lenders won’t do pre-approvals for refinancing or rental properties (ahhh….yet another reminder how small and specialized of a niche rental mortgages are). Some lenders add a premium on the interest rate for pre-approvals, as you can understand, they prefer seeing more ‘real deals’ than ‘pre-approvals’.
The pre-approval is the first step in the mortgage approval process, a future blog will discuss the subsequent steps. It is important to not forget, actual mortgage qualification is two-fold: you the applicant (can be reviewed preliminarily in the pre-approval), and the actual property (harder to get specifics ahead of time).