Mortgage Pre-Approval does not mean you’re good to purchase with no concerns. Don’t be fooled by this and don’t put firm offers in on any property without calling your mortgage broker first.
A pre-approval will tell you how much you can afford when you're looking at a house. What many clients don’t know is a pre-approval does not give you the right to go in on a purchase with a firm offer. Realtors must understand this as well and protect the interest of your clients. You should always obtain condition for financing for a minimum of 5 business days and if you really want to go in firm then you must consult with your broker first.
Here are some of the reasons why:
1. Pre-approval is just a system generated approval typically which no one looks at. Only a few lenders may look at the application with no documents in hand. The banks are even worse as they don’t dig into much of the required items until the deal becomes live. At times when clients send the documents in - their job details may differ from what was understood or what they’ve completed on an application. For example, temporary part time is different from permanent part time or commission or salary plus bonus or contract jobs or self employed, or fluctuating income. A T4 or Notice of Assessment from 2019 or an old job letter does not mean the income is currently the same. A pay stub may show 40 hours weekly but the current job letter later might state that the borrower is only guaranteed 30 hours a week and the rest are fluctuating or their letter may state they are part time on contract. This will throw your ratios out.
****For self employed borrowers, 2 years T1 General and YTD business statements will be reviewed to average the income. Financials, corporate tax returns, or T4A / T4/ T5 for those who are on commission or receiving Pension income or investment etc. may all be requested.
2. Property type/ location - Income and ratios can be well in line but if the property you purchased does not meet the lenders or insurers requirements then it’ll be declined. Mortgage brokers have gotten pre-approvals for clients in the past but upon receipt of the purchase agreement- the insurer or lender did not proceed because of the property.
3. Some lenders may have a cap on funding on that building if it’s a condo or some may not want to proceed because of a bad stigma on the property or area.
4. If the property tax or heat or maintenance fee is higher than what was used on your pre-approval application then the ratios will change and it may affect your borrowing amount if it goes over the GDS/TDS threshold.
5. There are situations when other properties owned were not included on the pre-approval application. This would cause major issues with debt servicing as you would have to disclose all properties owned as it’s part of your liabilities too eg. Property tax, heat or if there’s a mortgage.
WHAT IS GDS/ TDS ? It is gross debt service and total debt service. It cannot exceed a certain percentage. Eg. Ratios can be 39/44 for some insurers if your score is 680 +. However go to the 3 insurers website. Google CMHC, Genworth and Canada Guaranty to view their GDS/TDS requirements if you’re putting less than 20% down also look at the insurance premium that is capped on your loan based on your down payment amount.
If you’re putting minimum 20% down then it’s considered a non-insured deal meaning it is conventional. If your score is 680 + then your ratios can be 39/44. There’s exceptions to this rule as well.
Keep in mind, the lenders and insurers have the right to ask for any additional items prior to closing and choose to interpret the documents according to their risk appetite and guidelines. At times, it all depends which underwriter you get as well. Some would think out of the box and provide exceptions.
Some clients think going to the bank or an online calculator for a pre-approval is good enough. It doesn’t work that way.
Contact a professional mortgage broker that will walk you through this process. If there are issues that arise along the way on a deal, a professional broker will always mitigate and fight for you. A broker has access to multiple lenders and deals with the big banks, monoline lenders, alternative lenders, credit union and trust companies. Your options are not limited.
With our experience and understanding the various lenders guidelines, we know exactly who does what and know where a transaction will fit hence why we don’t submit client files to multiple lenders at the same time and know who to go to. We will also not leave your deal half way if we take it on. Call us for guidance and understanding of the process if you’re looking for to purchase or refinance.