Pre-Excitement over Pre-Approval
Mortgage Pre-Approval Misconceptions
A mortgage pre-approval is a highly beneficial tool in the world of real estate. By examining your finances, the mortgage lender has the ability to determine their maximum lending amount and outline the expected interest rate that will inevitably be tied to it. Not only do pre-approvals allow you to save valuable time when searching for the perfect home, but they also allow the client to walk into the home buying process with increased confidence.
The down-side to a mortgage pre-approval? Pre-excitement.
Obtaining a mortgage pre-approval does not give you deeper pockets or solidified purchase power. Regardless of the pre-approval amount, the client must always remember to check with their mortgage broker before a firm offer is made.
In order to ensure that you are getting a proper pre-approval, it is important to understand how the pre-approval process works as well as how to use it properly in order for it to benefit you the most.
Mortgage Pre-Approval Reminders
1. The pre-approval process is only a small part of the paperwork that lenders should be looking at when reviewing applications. Instead of viewing all of the required documentation prior to the deal becoming live, banks only review small portions, which means that your pre-approval is only valid to a certain extent. When it is not supported by further documentation, the file may even become useless.
In many cases, when clients submit their documents, the information can be miscommunicated or incorrect. For example, the client’s job details may differ between what has been communicated and what has been written on an application. Temporary part time is different from permanent part time or commission or salary. Bonus, contract jobs, self employment or fluctuating income also mean something different. You may also have a pay stub showing 40 hours weekly, however it may become evident later that the client is only guaranteed 30 hours a week.
Self employed clients should review their 2 year T1 General and YTD business statements to average their yearly income. Asking for the financials, corporate tax return or T4A / T4/ T5 for those who are on commission or receiving pension income or investment etc. are also great resources to use in order to better understand realistic yearly income.
2. Property type and location affect the purchasing power as well, meaning that the lender could potentially refuse to follow through with a deal depending on the property in question.
If the property does not meet the lenders or insurers requirement, they have full authority to decline the purchase.
3. Some lenders may have a cap on funding on specific building or areas, which would prevent them from proceeding with the deal.
4. If the property tax, heat or maintenance fee is higher than what was written on your pre-approval application, the ratios will change. This could affect the overall borrowing amount if it goes over the GDS/TDS threshold.
WHAT IS GDS/ TDS?
The gross debt service and total debt service. It cannot exceed a certain percentage (eg. ratios can be 39/44 for some insurers if your score is 680 +. However go to the insurers website.
Google CMHC, Genworth and Canada Guaranty to view their GDS/TDS requirements. If you’re putting less than 20% down, you can also look at the insurance premium that is capped on your loan based on your down payment amount. If you’re putting a minimum 20% down then it’s considered a non-insured deal, meaning that it is conventional. If your score is 680 + then your ratios can be 39/44. Please note that there are exceptions to this rule as well.
5. It is important that all previously owned property are noted on the pre-approval application. If this information was not included, it would cause major issues with debt servicing. This information is another portion of assessing your liability, including the property tax, heat and mortgage information of these previously owned properties.
Contact The House Team
It is important to keep in mind that the lenders and insurers have the right to ask for any additional items prior to closing and choose to interpret the documents according to their risk appetite and guidelines.
In some cases, the approval process may heavily depend on which underwriter you get. Some underwriters think outside of the box and can provide the client with exceptions.
In order to gain a proper mortgage pre-approval, it is imperative that clients contact a professional mortgage broker. Not only will they walk through the entire process with the client, ensuring that all of the information is accurate and understood, but they will also mitigate and fight on your behalf if an issue happens to arise.
The professional brokers at The House Team have access to multiple lenders, bank deals, alternative lenders, credit unions and trust companies. Although the process may seem daunting, your options are not limited. With our experience in understanding the various guidelines and documentation, you will have the necessary knowledge you need to make a prepared and informed offer.
Do you need a mortgage for a purchase or refinance? Contact The House Team at (866) 559-5016 for guidance in understanding and walking through the pre-approval process.