Hedging all your bets on a mortgage pre-approval can be either a benefit or a disadvantage. It all depends on how well you educate yourself on what will be one of the most important decisions of your life.
Pre-approvals offer several benefits:
• The most favorable pre-approvals accurately outline your qualifications and how much house you can afford.
• 90-120-day rate guarantees protect you in the event rates increase while you look for a home.
• Pre-approvals give you more credibility to sellers and real estate agents, and in situations such as bidding wars, they can give you an important edge against the competition.
• They cost nothing and you’re not obligated to use the lender that pre-approved you.
It’s important to keep in mind that pre-approvals are not full approvals, so make sure you understand both their benefits and limitations.
Every mortgage shopper should be aware of the following ten pre-approval facts:
1. Shop around
Be aware that not all lenders review your qualifications when issuing a pre-approval. Some will provide only a rate guarantee that is subject to later approval. Since mortgage advisers don’t always disclose this, save yourself potential disappointment by choosing a lender that requires documentation and confirms qualification.
2. Educate yourself
Understand the difference between a pre-qualification, which mortgage advisers use to confirm that you meet general guidelines. Only the lender’s underwriter actually confirms that your income, down payment, purchase agreement, property information, credit and debt ratios have been approved.
Realistically, not every prospective mortgage shopper will have ideal qualifications such as a 20% down payment, steady employment, verifiable income, perfect credit, and minimal debt. Therefore, select a lender that will review your application and documentation before they grant pre-approval.
3. Be smart with appraisals
Though appraisals are a requirement for a mortgage, they aren’t done at the pre-approval stage because you have yet to find a home. As such, there’s always a risk with pre-approvals because if the valuation appraisal provided by the lender or mortgage insurer determines that you overpaid or the property has defects, it can render your pre-approval worthless. It’s smarter to insert financing conditions in your purchase offer, or at least appraisal conditions, or better yet, get an appraisal before you make an offer.
If your down payment is less than 20%, mortgage insurance is typically required. Therefore, it’s even more important to add a financing condition because default insurers like CMHC don’t look at pre-approvals. They can decline you or your property for several reasons, and buyers who don’t include financing conditions are at risk of not closing, losing their deposit, or even being sued.
4. Don’t depend too much on appraisers
It’s a mistake to assume appraisers will identify every problem with a property. That’s particularly important regarding condos, where time and constraints prevent many appraisers from reviewing condo board minutes, financials and engineering reports. Problems can incur special levies, reserve deficiencies, and if any legal problems or structural issues arise, lenders can lose interest and leave you with a useless pre-approval.
5. Watch your finances after pre-approval
Don’t let your guard down after pre-approval. Keep in mind that missed or skipped payments, increasing debt, job or income changes, co-signing for others, and tampering with your down payment funds could void your pre-approval.
6. Pre-approvals don’t always come with the best rates
Statistically, only around one in six pre-approved homeowners actually accept the mortgage for which they were pre-approved. But the lender still bears costs, such as rate hedging and application processing costs, for the five out of six pre-approved mortgages that don’t close.
As a result, pre-approvals don’t typically offer the best rates and could range from 0.10-0.15 percentage points above market rates. This is insignificant compared to what it would cost you if rates rise and you’re not yet pre-approved.
Typically, the most advantageous mortgage rates are for 30-day to 45-day closings. Keep a constant on on rates 30 days before closing. If they increase more than 0.10 percentage points below your pre-approval rate, ask your lender to match them. If they refuse, re-apply elsewhere, but don’t trade a flexible mortgage for a slightly cheaper, restrictive mortgage. Many homeowners make the mistake of underestimating their need for refinancing flexibility later.
7. Patience is a virtue
Mortgage brokers will often time pre-approval submissions to obtain better rates for well-qualified buyers. This is critical especially if rates are flat or trending down. In such situations, the goal is to monitor the market and withhold submitting files until rates are at their most favorable for clients.
8. Reset rates if appropriate
If rates remain low and you’re still searching for a home, make sure you reset your pre-approval every 45-75 days. Doing so will not only extend your rate hold, but will safeguard you against any rate hikes before you close. Consider changing lenders if your lender restricts rate resets.
9. Play it safe by getting a second pre-approval
Since lenders don’t issue more than one pre-approval at a time, make sure you have a contingency plan, especially if 45-60 days have elapsed, rates have increased, or you need more time to find a home. Obtaining a second pre-approval with another lender provides a valuable backup in case you need it. Otherwise, if you’re unlikely to close within the timeframe of the original pre-approval, try to negotiate with the existing lender to reset the rate hold period.
10. Terms are important
Shop around and choose pre-approval terms that offer you the most benefits. Opt for the longest rate hold, such as 120 days, the highest discount rates, full underwriting and the most advantageous mortgage features, including good prepayments, fair penalties, and good port and refinance policies. Very few lenders meet this criteria, so do your homework.