‘Mortgage Pre-Approval’, the most misunderstood phrase in the mortgage industry. When I think about 2018, what stands out to me is the number of clients, realtors, friends and fellow mortgage brokers who called me in a panic because their bank will no longer honour their pre-approval. Unfortunately for the client this usually happens within proximity to their closing date and sometimes even on the week/day of closing. 2018, the year of the failed pre-approval.
Pre-Approvals differ depending on which lender you’re working with and sometimes even depending on which representatives you’re talking to within that institution. The process for most pre-approvals is simple. They take your application, input it into their system, run your credit and based on your credit scores and all the information provided their internal system will tell them if you are pre-approved or not.
As a buyer it is extremely important to understand that a pre-approval does not mean that the lender is guaranteeing them mortgage financing. In my opinion the break down in communication comes from over zealous mortgage reps who don’t properly explain to the buyer the material risks of the pre-approval. In short, the pre-approval is based on very little information which has to then be verified by the lender. This is where the issues arise. Below are 6 common pre-approval killers.
- Employment – It is very important that the lender knows exactly what you do for employment. Length of employment is a factor in the approval and needs to be accurate. Some employees are paid as contractors/sub contractors and their employers do not deduct taxes. This changes the type of “employment” for the applicant which requires a different set of supporting documentation to confirm their income. As of late, the conditions list for self employed clients has expanded, it is imperative that self employed clients go over the conditions required with their mortgage rep and make sure all the information is properly stated.
- Value – Depending on the property you are purchasing and the lender that you are working with, an appraisal of the home may be required. For the most part, the mortgage rep should know if an appraisal will be required or not. Unfortunately, the appraisal is usually not ordered until the mortgage is signed and accepted. In some situations, the appraised value is less than the amount agreed in the purchase and sale agreement. This will cause issues because the lenders will only lend on the appraised value and the clients will have to bring the shortfall to the table.
- Sale of Existing Property – Some clients look for the home they are purchasing before listing their home on the market. When going over the mortgage application, you stated that your current home will be sold prior to this purchase, it is important it gets sold! Even if you do not need the sale of that property for your down payment, the lender will have to re-review the debt qualification ratios because they will now have to include the other property as well. This was a very common occurrence in 2018 when many hot real estate markets cooled off.
- Down Payment – A common misconception is that as long as you have the down payment you can get a mortgage. Technically yes, however there are many caveats. When working with financial institutions it is important that you properly state the amount of the down payment and the source. Lenders will ask for documentation to verify where the funds are coming from. For example if you state that the down payment is yours from personal savings and the lender finds out that the money was borrowed, came from overseas or was a gift from your family they may not honour their pre-approval (depending on the product that you were approved for)..
- Credit Worthiness – Most pre-approvals are done well in advance of the closing date, if it is long enough the lender will require a new credit report to be pulled before funding their mortgage. If your credit score has dropped below the threshold for that mortgage product, the lender will withdraw their approval. Another issue that could arise when pulling the new credit score, new debts the lender did not know about. Some clients may have gone out to pick out new furniture or acquire a new loan, or even increase credit cards/lines of credit limits. This will change the qualifying ratios with the lender and may tip the scales to the point that they pull the approval.
- Human Error – Something we don’t like to admit but happens is human errors. The agent entering your application could have done something incorrectly. This will not come into the open until the lender starts to review the documentation that was submitted. There are many errors that although small could make the difference between the lender honouring or cancelling the approval. In most cases these are honest mistakes. In some cases, it is the mortgage rep being a little over zealous and thinking something would go unnoticed.
Purchases and mortgages in general are not simple, it is vital that the buyer completely trust the mortgage agent that they are working with. You are putting your home in their hands, do the best you can to ensure that you are dealing with an experienced agent.