PRE APPROVALS
Widely used but little understood.
The term pre-approval is perhaps one of the most widely used and little understood terms in the mortgage industry. One of the purposes of a pre-approval is to hold a rate for a period of time – typically 120 days – so that if rates go up while you’re shopping you don’t get stuck paying the higher interest rates.
If you obtain a pre-approval that expires on, for example, March 31st, when you write your purchase offer on a property the completion date for the purchase must be on or before March 31st in order for you to get the pre-approval rate. A pre-approval can also be renewed if it’s getting near the deadline and it looks like you’re going to need more time, however it will be at the current rates at the time of renewal rather than the original rate.
The other half of a pre-approval is your qualification for the loan. Oftentimes large banks will only issue a rate hold as described above without looking at this second piece. Your mortgage broker, however, will likely want to see some documentation up front such as confirmation of your income (a job letter, pay stub, and or notices of assessment) and confirmation of your down payment (bank statements or a gift letter). The reason for this is so that they can actually confirm that you qualify for the size of loan that you’re asking for. If there’s anything unusual about your income or down payment, this also gives your broker a chance to deal with any difficulties up front before you’re under the gun of a subject removal deadline.
Another misconception about pre-approvals is that once you’re pre-approved, you don’t need to include a subject to financing clause in the purchase contract. This is absolutely false. Even if your broker has already done the work of confirming your income and down payment ahead of time, the lender still needs to sign off on the property that you’re purchasing.
In the case of a condo, some lenders will want to review condo documents including the financial statements. If you’re dealing with high-ratio financing, this means obtaining insurer approval as well. This component can’t be dealt with ahead of time, thus making the subject to financing clause essential even when you already have a pre-approval.
Having a pre-approval can provide significant peace of mind when you’re shopping for a home. In a market where rates are not increasing significantly or are decreasing, they are somewhat less important in terms of holding a rate. However, having your broker review your income and down payment documentation gives you a more concrete picture of what you can afford, what the options are, and what they payments will look like. Having a pre-approval in hand while shopping can also strengthen your bargaining position, as you’re more likely to have your mortgage fully approved should your offer be accepted. It’s well worth a conversation with your broker before you start looking to set a budget and get that pre-approval in place. This can be a little more work up front, but it will save you stress and uncertainty in the long run.
