You may be pre-approved for a certain mortgage amount, however there are still a number of variables that can enter the picture once an offer is accepted. That's why it is imperative that one always include a clause in the offer along the lines of 'subject to receiving and approving financing'. (There are variations to be discussed around the specific wording.)
Often clients are reluctant to write the initial offer on a property without feeling like they are 100% pre-approved.
An understandable desire. The risk, though, is that some may falsely believe that they have a guarantee of financing. They don't.
A lender must review all related documents - not just those of the clients. 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 pre-screening - a first step only.
It does involve an analysis of the client's 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 accepted. Clients should also come away from this initial process with a clear understanding of the maximum mortgage amount they qualify for, along with various related costs involved in their specific real estate transaction. Equally important; with the completed application your Broker is able 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 an offer.
- If more than for weeks pass, all of the documents are out of date - by lender standards - and a fresh batch needs to be ordered and reviewed.
- The conversion rate of pre-approvals to 'live transactions' is less than 10%.
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It is this last point that makes it so difficult to get an underwriter
to completely review a pre-approval application as a special exception.
The bottom line is that a client's best bet for confidence is the
educated and experienced opinion of the front-line individual with whom they
are directly speaking - and that's their Mortgage Broker. This individual will
not be the same person who underwrites and formally approves the live
transaction when the time comes.
This disconnect between intake of application and actual underwriting of
a live file makes having a ‘subject to receiving and approving financing’
clause in the purchase sale agreement so very important.
Perhaps the most significant factor in undermining the solidity of a
client's pre-approval is the relentless pace of change of lending guidelines and
policies – changes implemented not only by the Federal Government but 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.
It is absolutely worthwhile going through the pre-approval process
before writing offers, and in particular before listing your current property
for sale or accepting offers. This will give you a good idea of your maximum
mortgage amount as well as securing a rate for you. It is a worthwhile endeavor.
Just be aware that aside from the key advantage of catching small issues
early and securing rates, a pre-approval is not a 100% guarantee of financing.
But the good thing is, I can help you with this
process!
Give me a call and we can discuss options (604) 290-4835 or lizreid362@gmail.com
