What’s the difference between a Pre Qualified vs Pre Approved Mortgage?
A Mortgage adviser can Pre qualify you to confirm that you meet the general guidelines for a loan and can also tell you how much house you can afford, based on the information you provide.
The next step is a Pre Approval. At this stage, your information is provided to a lender’s underwriter so the lender can Pre Approve you.
However, pre approvals are not full approvals
A pre approved mortgage is not a guarantee of being approved for the mortgage loan. Until you complete a full application and the lender’s underwriter confirms that your income, down payment, purchase agreement, property information, credit and debt ratios meet their full approval, you are not fully approved.
What happens in the pre-approval process?
- You and your mortgage specialist will discuss your needs, type of mortgage, mortgage amount, down payment, purchase price, etc.
- You will discuss and choose from the various available mortgage options such as fixed vs. variable rate, interest terms, payment options, amortization, etc.
- With your consent, your mortgage specialist will take an application, which will require you to provide details on such items as employment, income, assets, down payment and liabilities
- You’ll give the lender permission to obtain a credit bureau report.
- Your mortgage specialist will advise you about what documentation you need to supply upon conditional approval of your mortgage. Any conditions must be met for your mortgage to be fully approved.
Remember, the value of your pre approval goes up with the amount of information you provide up front. If key information is missing, you end up with a longer list of conditions that need to be met and you face a greater risk of being declined at a later date.
Why Bother With A Pre approval
• It saves you time because you’ll only look at homes in your price range
• You’re protected if interest rates rise while you’re shopping. If rates go down, your lender will honor the lower rate
• You appear more serious to sellers and real estate agents
• You will improve your chances in a competitive offer situation
• It’s a free consultation
It’s important for borrowers to understand that a ‘pre approval’ is not the same as a ‘full approval’ and you should know the limitations
Here are some pre approval facts you should know:
1. A Pre Approval is not a Full Approval
Many lenders don’t review your qualifications when issuing a pre approval. They provide only a rate guarantee, subject to later approval. Until you complete a full mortgage application and provide all the required documents, you only have a rate guarantee!
Home buyers often want to avoid or put off preparing and submitting all of the documentation needed for a full approval. This may seem like less trouble, but you might be told by the lender at a later date that they can’t qualify you even though you’ve been told you were ‘pre approved’.
No lender can guarantee a pre approval without reviewing all the documentation!
2. The Appraisal is The Missing Link
You need an appraisal to get a mortgage, but appraisals aren’t done at the pre approval stage. It’s impossible to get an appraisal on a home you haven’t found yet. Even if you know which home you would like to buy, you’re not likely to put out the money for an appraisal until the seller accepts your offer to purchase.
That’s the big missing link in a pre approval. If the appraisal reveals problems with the property or does not support the value, your pre approval becomes worthless.
That’s why it’s important to include financing conditions and even the appraisal itself in your offer to purchase.
If you’re putting less than 20 per cent down, a financing condition clause is even more important. This type of purchase requires an insured mortgage and default insurers like CMHC don’t look at pre approvals. They can decline you or the property for any number of reasons. If you don’t have a financing conditions clause you risk not closing, losing your deposit and/or being sued.
3. You Can Blow Your Pre Approval
Lenders usually do another credit check just before closing. You can lose your pre approval if you have missed any payments, have taken on new debt, changed jobs or co-signed for someone else’s loan.
4. Why Most Lenders Don’t Do A Full Approval
The main reason most lenders don’t do a full approval when pre approving someone is that less than 20 percent of pre approved borrowers actually take the mortgage they got pre approved for.
Lenders incur costs even for the 80 percent of pre approved mortgages that don’t close.
5. Features matter
The best mortgages have slightly higher rates. Homeowners underestimate the importance of being able to refinance. By choosing a low frills mortgage they end up paying penalties that far outweigh the bit of savings from a slightly lower rate.
Look for a pre approval with the longest rate hold at the best rate for similar mortgages. Check that the mortgage comes with the best mortgage features like good prepayments, porting, a fair penalty and good refinancing policies. Not all lenders provide all these important features.
Lenders offer their best rates to borrowers who:
• have a 20 per cent down payment from your own resources
• have a good employment history
• have provable income
• have spotless credit
• have low debt.
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