Although going through the pre-approval process is more important than ever, the actual term ‘pre-approval’ is often misleading. It really addresses just a few variables that may arise once in the middle of an actual offer.
The pressure in many markets has never been greater to write a condition-free offer, yet due to recent changes to lending guidelines by the federal government, the importance of a clause in the contract along the lines of ‘subject to receiving and approving satisfactory financing’ has also never been greater. (There are variations to be discussed with your Realtor around the specific wording of such clauses.)
Often clients are reluctant to write the initial offer on a property without feeling like they are 100 per cent pre-approved. An understandable desire. The risk being that many clients then falsely believe they have a 100 per cent guarantee of financing, and this is not at all what a pre-approval is.
A lender must review all related documents, not just the clients personal documents, but also those from the appraiser and the realtor as the property itself must meet certain standards and guidelines.
The pre-approval process should be considered a prescreening process. It does involve review and analysis of the clients current credit report, it should also include a list for the client of all documents that will be required in the event that an offer is written and accepted. Ideally your Mortgage Broker will review all required documents in advance, but few lenders will review documents until there is an accepted offer in place.
Clients should come away from the initial process with a clear understanding of the maximum mortgage amount they qualify for along with the various related costs involved in their specific real estate transaction. Equally as important; a completed application allows the Mortgage Broker to lock in rates for up to 120 days.
Why won’t a lender fully review and underwrite a pre-approval?
- Lenders do not have the staff resources to review ‘maybe’ applications – they have a hard enough time keeping up with ‘live’ transactions.
- The job you have today may well not be the job you have by the time you write your offer. (ideally you do not want to change jobs while house-shopping)
- If more than four weeks pass then most of the documents are out of date by lender standards, and a fresh batch needs to be ordered and reviewed with the accepted offer.
- The conversion rate of pre-approvals to ‘live transactions’ is less than 10 per cent, and this alone prevents lenders from allocating recourse to reviewing pre-approvals.
It is this last point in particular that makes it so difficult to get an underwriter to completely review a pre-approval application as a special exception. Nine out of ten times that underwriter is spending their time on something that will never actually happen.
The bottom line is that a clients best bet for confidence before writing an offer is the educated and experienced opinion of the front-line individual with whom they are directly speaking, their Mortgage Broker. Although this individual will not be the same person that underwrites and formally approves the live transaction when the time comes they likley have hundreds of files worth of experience behind them. That experience is valuable.
It is due to the disconnect between intake of application and actual lender underwriting a live file that having a ‘subject to receiving and approving satisfactory financing’ clause in the purchase sale agreement is so very important.
Without a doubt the most significant factor in recent years which has undermined clients preapprovals is the relentless pace of government changes in lending guidelines and policies. Change implemented not only by the Government also by the lenders themselves. It is very easy to have a pre-approval for a certain mortgage amount rendered meaningless just a few days later through changes to internal underwriting guidelines. Often these changes arrive with no warning and existing pre-approvals are not grandfathered.
So, while it is absolutely worthwhile going through the pre-approval process before writing offers, and in particular before listing your current property for sale it is most important to stay in constant contact with your Mortgage Broker during the shopping process.
Be aware that aside from the key advantage of catching small issues early and securing rates a pre-approval is NOT a 100 per cent guarantee of financing.
This article was originally published in the Dominion Lending Centres June 2017 newsletter.