• Are preapprovals misleading?

    The short answer is: yes, they can be.

    A preapproval for a mortgage should never be considered as a guarantee that you will be approved when the time comes to purchase. This is due to many reasons.

    Reasons A Mortgage Pre-approval Is Not A Guarantee:

    Documents Are Not Checked In Advance

    The biggest reason you should be wary about a preapproval is that your documents are likely not checked thoroughly by the lender or the underwriter. When applying for a mortgage, the lender and mortgage broker look at three main points: income, credit and down payment. Nowadays, most lenders and their underwriters are so busy that they will only scrutinize the documents on live files. Thus, when you receive a preapproval the lender is essentially taking your word for it that all of the information you have presented is true and accurate. The problem is that if you tell the bank that you make $100,000 a year and you neglect to tell them something like you just started a new position or a new company or that that includes bonuses and a car allowance etc., you will be in for a very big surprise when you purchase that home and you find out that you actually don’t qualify. This is why it is important to speak with a mortgage broker who will spend the time to look at your documents and warn you if he/she sees any potential issues.

    The Property Is Hypothetical At Pre-Approval Time

    When you submit an application for a preapproval, some assumptions need to be made about the property you will be purchasing because at this point it is still hypothetical. for example, if you are preapproved for the purchase of a detached home with property taxes of $4000 per year, and you end up purchasing a condo with property taxes and a condo fee, that may completely change the amount you can qualify for. There are also many other examples where you may be theoretically preapproved but when you purchased the home, the actual home does not qualify. This could be because of its location that is not close enough to a populated area, that the property is too large, that it is on a well and does not meet the specifications, that it is commercially zoned or in an industrial area. The list goes on and on. This is again why it is important to speak with a mortgage broker that will spend the time with you and discuss the limitations. This is also why it is important to make any offer to purchase a home conditional on financing.

    Personal Finances And Circumstances Change

    You may be preapproved today for a certain mortgage amount but there are many life changes that can happen in the meantime that could impact this preapproval. For example, if you lose your job, change your job, take out some loans, or late on payments affecting your credit, all of these points and many more will affect your ability to qualify when the time comes.

    So Then, When Am I Guaranteed To Get The Mortgage???

    Many people don’t realize that even approvals are no guarantees that the lender will fund on the closing date. Every single approval is conditional. this is why lenders and mortgage brokers will ask you for income documents, separation agreements, mortgage statements, property tax statements, waivers on purchases and the list goes on and on. You are guaranteed to get the mortgage on the closing date when it has funded and you are handed the keys! That is the reality. It is the job of the mortgage broker in collaboration with the borrower to satisfy all of the conditions and be honest, truthful, and transparent throughout the process. A lot can change from the time of approval to the closing date so it is important to tread carefully. I have seen days before closing people take out a car loan and the bank checks which they have every right to do right up until the closing date, and they decline the mortgage at that time. This causes a lot of undue stress and anxiety to the client and the mortgage broker.

    Then what is the point of getting a preapproval at all?

    There Are 2 Main Reasons To Get A Preapproval:

    Rate Hold

    When you do a preapproval the lender will generally hold the rate for90 to 120 days. This is very advantageous and there is no downside because if the rates go up during this period from the time that you made the preapproval to the time that you purchase your home, you will have the right to the preapproval rate. There is one catch: the preapproval rate is usually a little bit higher than the actual rate that you would get if you were purchasing at that time. That’s because the bank factors in a premium knowing that they are holding this rate for a long period of time.

    Document Review

    When you do a preapproval with a mortgage broker, the broker really should review all of your documentation and scrutinize everything including your credit. If there are some questionable items about your file, a good mortgage broker will have a relationship with some lenders that they can discuss how this will be received by the lender at the time of the purchase. This is all about providing the borrower with peace of mind and security. 

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