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Monday, 28 April 2014

Are you Really Pre-Approved?




This article is written by Anoop Bungay and originally published in the Calgary Real Estate News, Mortgage Matters section in 2001/2002.

Are you Really Pre-Approved?

Each of you have probably heard this mortgage disaster story. It starts off with someone looking for a home and visiting a lender in order to be pre-approved for a mortgage. After a few questions, the lender says, “Congratulations, you Qualify! Go ahead, find a house for no more than “x” dollars and we will guarantee your rate for 90 days”. Everything seems fine for our new home buyers until they find their dream home, put in an offer (which becomes accepted) and go back to the bank in order to finish the paperwork.

After all the job letters, paystubs, downpayment verification is presented, the lender comes back and says, “oh, I am sorry, you no longer qualify, we can not get you approved”.

What happened? How could this happen? What do you do so this does not happen to you?…

In the example, our buyers learned the difference between Pre-Qualifying and Pre-Approval.

Pre-Qualify:

Pre-qualification is part of the pre-approval process. It is simply a calculation of how much an applicant "may" qualify for given unverified gross income figures. The lender finds out where you work, how much you make and what your expenses are.

Based upon that information they calculate the maximum amount of financing you would qualify for. This is a simple procedure and you are not asked to provide documents such as job letters, paystubs, tax returns, etc.

To be pre-qualified does not mean that you are ready to go to the lawyers office because the lenders have not taken into consideration all of the other factors that affect you. For example, there is no credit check or formal income and downpayment verification.

Lenders often provide you with a pre-qualification simply to let you know what you can afford. If you are really serious about purchasing a new home, then you should be asking for a Pre-Approval.

Pre-Approval:

When you are pre-approved, it means that the lender has reviewed the financial information from your application and has determined a maximum amount of financing you can afford. The information required for a pre-approval is more than pre-qualification because you are asked to provide all of your documentation up front. For example, you will be required to show your letter of employment, your recent paystub, your T4’s or Notice of Assessments. You may also have to provide almost as detailed as that required for a proper mortgage approval.

The benefits of being pre qualified are numerous, the more important of which include:

• shopping within your price range without having the concern or risk that major complications will arise in the final hour (like the buyers in our example).

• you may be able to make a stronger purchase offer without "subject to financing" conditions. Therefore, your Realtor will be able to negotiate harder on your behalf and get you your home ahead of other competing offers.

The only thing left after a pre-approval is getting the lenders approval of the property, usually determined by an appraisal. In summary the pre-qualification process has 5 steps:

1. Phase 1: An initial pre qualification is given based on unverified gross income figures.

2. Phase 2: A full pre qualification, yet unverified, is done based on information provided in the mortgage application.

3. Phase 3: Verification of all financial information including income and employment, savings and equity, etc.

4. Phase 4: Verification of credit worthiness.

5. Phase 5: Lender approval of property through a property appraisal.


Pre-Quantification

Pre-quantification is part of the pre-qualification process. It is simply a calculation of how much an applicant "may" qualify for given unverified gross income figures, and utilizing a Gross Debt Service Ratio (GDSR). The calculation also takes into consideration expected expenses.

The lender then takes the amount calculated and comes up with the maximum amount of financing you would qualify for based on your income. This procedure is simply the reverse of calculating a mortgage payment given the payment amount, amortization and interest rate.

Ask your licensed mortgage broker for more information. Or email info[at]mortgagequote.ca.