Many Canadians believe that a mortgage pre-approval means they are approved for a mortgage, but this is not the case. The lender needs to approve the property in question, review any terms in your agreement, and finally review all of your personal documentation before you can transition from pre approved to fully approved.
So what does it mean when someone has been pre-approved? It simply means that they are qualified for a mortgage up until the point where their application is reviewed by an underwriter or loan officer.
When you’re applying for a mortgage with less than a 20% down payment, there are two different approvals that need to be granted. The first is from the lender and then again from the insurer.
The pre-approval considers only your personal creditworthiness and borrowing capacity. The amount you qualify for will depend on the property itself, plus any lender or insurer assessments that are performed when reviewing your application. Pre-approvals do not consider specific properties.
To secure your mortgage, you and the property have to pass muster. No one knows the exact property you are going to buy when you get pre-approved. When it comes time for the lender to approve your mortgage, there are many ways the specific property can cause issues in the approval process.
Value of The Home: When multiple buyers are competing for a home, there can only be one winner. In this market, it's not uncommon for bidders to offer well beyond the market value. When this happens the appraisal may come back with a value less than you paid. That will not necessarily ruin your mortgage approval, as long as you have additional financial resources to cover the shortfall if need be.
Property Condition: The appraisal may report poor conditions, mold, or even structural issues, which will be a red flag to the lender.
Property Types: Here are some examples of property types that may seem problematic to the lender:
Homes on leased land like provincial/national parks or leased vacation property
Properties containing asbestos, underground oil tanks, aluminum wiring or polybutylene piping
The remaining economic life of the property
A former drug lab or remediated house fire
Location: If a lender feels the property you picked is too far from your workplace, they may assume you need to keep a second home or place to stay, and in such cases, they impute a “shelter cost” for you.
Condos: Mortgage insurers keep lists of condo buildings they do not want to lend against. Maybe the maintenance fees seem extraordinarily high, for example.
Your mortgage may not be approved because of something to do with you, the borrower. Either there's new information that was unknown before and it changes how a lender views their risk or maybe some material change has occurred in your life since they last checked up on things.
Try to avoid change during the home buying process. Changing careers, or buying that new car can cause serious issues in getting approved for your mortgage.
Do not defer loan payments. Mortgage lenders might think twice about lending any amount to someone who needs relief from their financial obligations.
When you set your sights on a specific property, make sure to first check with your mortgage broker and ask them to input the property’s specs into your application.
If you are looking at condos, ask your lawyer to carefully review the condo documents in advance and report any and all items of interest to you.I hope this article has helped you learn about the mortgage process and how to avoid getting into any trouble. If you're ready to buy a new home, contact me for a pre-approval, call anytime at 403.894.8836.