Pre-Approval or Rate Hold...what is the difference?

Due to the sheer size of content in this blog I have also created a vlog that you can watch on my channel on YouTube.

Everyday I speak to people about a mortgage and usually many are confused as to the different financial terms used within the banking industry.  A perfect example of this confusion is prior to purchasing a new property, the difference between getting a "pre-approval vs a rate hold".  Everyone tells new home buyers that they should "get pre-approved", but what does that mean, and how are you really to do this?

The difference in terms is vast and hence why I feel it an important topic to discuss.

Here is what typically happens...you wander into your bank to do some banking activities and you remember about that "pre-approval thingy" your friends/family have told you to get.  You ask the bank teller non-nonchalantly "what are your mortgage rates right now"?  Immediately you are told that it would be best to speak to a bank Mortgage Specialist and well, look at that, they can see you in the next few minutes!  You are escorted into an office and asked a series of questions about your income and debts (which many times most people cannot pull exact #'s from memory, or for that matter, remember their spouse's income & debts?)   From the information provided, they do up a quick "rate-hold" for you so that you don't miss out on that special deal they are offering.

You think you are "pre-approved" and this is where I say to you...Uh Uh Uh, MISTAKE, you only have a rate hold!

Rate hold's essentially are a guaranteed interest rate, for a typical owner-occupied property, that the bank is willing to hold for you for anywhere between 90 and 120 days.  The lender usually bases the rate hold on your total income, less your basic debts you have disclosed to the bank.  Problem is, there really has been no due diligence done to ensure that you actually qualify for this rate, or that it is for applicable the type of the property you are wanting to buy.  This could potentially be a real eye opener at crunch time, when you have an offer on a property and the bank is telling you, sorry, you actually you don't qualify for this low rate.   WHAT? 

There are many things that can cause a bank to deny your maximum mortgage amount that you thought you qualified for with a "rate hold".  Some examples are:

1. Your debt load has increased since you last spoke to someone regarding financing
2.  The property you want to buy does not qualify for the rate they held for you (i.e. rental property, mobile home, condo that has building envelope "issues", etc.)
3. The bank's lending criteria has changed and they no longer provide the type of mortgage you need (i.e. low down/0% down financing, self-employed stated income mortgages, etc.)

This is where people are shocked by the process and sometimes feel trapped into just taking whatever will work in order to not lose the house they have fallen in love with.

Now a true "pre-approval" is one where you sit down with a Mortgage Broker or bank Mortgage Specialist, with all your income paperwork proof (i.e. 2 year's recent tax returns or notice of assessment summaries, all your current debt information - car payments, credit card bills, etc) and you sign a consent form allowing the Broker to pull your credit report.

From this total package that is made up for you, the Broker can determine your credit worthiness.  This is so much more advanced for serious buyers, so that if you are actively looking to buy in the next 3 to 6 months, you know where you stand with your financing.

Many Brokers will also provide you with a written letter for your Realtor to see so that they know exactly what you can afford.  These pre-approval letters are time-sensitive (rates change all the time so the letter will typically have an expiration date on it).

Now some people ask, "why should I allow the Broker to pull your credit now"?   Well this is simple, really you don't want any surprises when it comes time to having the financing go through and it also offers you the ability to know if you need to clean up some of your debts before purchasing. 

I have many times pulled people's credit reports to find that there are things on there that they were not aware of on their credit report (i.e. outstanding child support payments, utility bills from 4 years prior, etc).  I have found that if you face things head on as soon as you are aware of them, you have a far better chance of improving your credit score to qualify for the best rate possible.

A BIG side note I would like to offer you regarding credit...if you go to the bank and have them pull your credit report it is called a "hard pull" or, in effect, will lower your credit score by as much as 5 points for up to 6 months.  If you go to multiple banks yourself to shop rates, and give each bank the permission to pull your credit score, you can substantially reduce your credit score and therefore mess up your good credit.  Many people do not realize this.  

If you go to a Mortgage Broker we do what is called a "soft pull" or a basic credit check that does not affect your score.  We can then use this credit score to share with multiple lenders OR to coach you on the best way to improve your rating.  In effect, a Mortgage Broker does offer you a far better way to shop for the best rates, without ruining your score and potentially your interest rate savings.

There are so many things to think about when buying, but having the proper information from the start with little to no surprises during the purchase process, can make everyone's life so much easier.

Let's face it, no one wants to have a last minute fiasco happen on one of the largest purchases you will ever make.  Spend the time to make sure you are prepared when the time comes and you find the perfect home!

Happy house hunting!

Liz
    

Refinancing or Renewing? What is the difference?

The other day I had a client call me looking to renew his existing mortgage that was coming up to it's expiry date.  We started talking about the particulars of his mortgage and the question came up...do you need any extra $$ for debt consolidation?

I explained that now really is the time to do this if he wanted to he would not incur a penalty because the mortgage was already expiring.  He thought for a moment and then said "no" but was curious about the process if he did need cash.

This is when I realized that many people do not think of their mortgage as something they can adjust in the event they need $$. 

Here is the lowdown in Canada right now.  Say you have an existing mortgage that is coming up for renewal.

To be clear, a renewal is when your existing mortgage term is expiring with your bank and you need to do one of three things:

1. Renew with the bank you have your mortgage at by calling and having them roll you over into another term & rate.  
2. Call your local Mortgage Broker to inquire about rates available at other lending institutions.
3. Pay off your mortgage all together

Now of the above three options, most people select option #1 because it is convenient and easy at the time. BUT many times it can cost you BIG $$ in the long term.

Why?

Because banks do not always offer you the best renewal rate when you are rolling over from one term to the next.

If you are not paying attention, they can put you into a term that is too long, or worse, give you a rate that is way higher than what is currently available from other banks.

They know and hope that you DO NOT do your homework to see if they are being competitive. 

This is more common than you know and a serious argument for people to really do their due diligence!

Now with Option #2, this is usually the best way to ensure that you are receiving the best rate and time of term for you.

I know I am biased when it comes to Mortgage Brokers, but really Independent Brokers spend the time to ensure that you don't get into a long mortgage term that requires a penalty to break...AND they ensure that you are getting the best rate available for your specific circumstance.

ALSO, the best part is that the Broker is FREE to you as the new bank pays them when the mortgage funds!  Really a win win situation!

Now with Option #3, unless you have recently won the lottery or have come into some major $$ through an inheritance or other windfall, most people do not have this as an option at all.  But in fairness, it is an option so I had to include it.

Now once you have selected your option of what you would want to do, you need to consider if you need more $$.

This could be for a variety of reasons:

• Pay off debt
• Renovations
• Tuition for school
• Investments in a business or the stock market
• Buy another property

If you choose to refinance (add more to your mortgage) there are a few things that you will have to do regardless of whether you change banks or not.

1. You will need an appraisal to determine the current value of your property (unfortunately, most times the property assessment is not good enough)
2. Lawyer or Notary to re-register the new $$ amount on your property title

Both of the above do cost you a bit of $$, of which you can guesstimate the costs and add it into the refinance amount if necessary (your mortgage Broker can help you with this too).

In the end, a renewal is a simple switch into a new property and is worth the effort to investigate your options.

Don't go to all the trouble of getting the best deal on purchasing a property, finding the best rate once purchased, and then drop the ball 5 years later because it was easy.

Really, if you don't fight for the best use of your money, who will?

Until next blog...

Liz

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