Is your pre-approval worth anything?
Imagine visiting your financial institution and obtaining a pre-approval for a mortgage. Your next step would be to go out and find the home of your dreams. Once you find the home, negotiations take place and you enter into an accepted agreement of purchase. Now that you have purchased a property you return back to the financial institution to finalize your financing. To your surprise, your financing gets declined.
This situation is becoming more and more common and many borrowers and realtors are getting frustrated. Borrowers need to understand the difference between a pre-qualification and a pre-approval. Generally speaking when you obtain a pre-qualification(offered by most banks), the institution takes a quick look at your total household income with any debts you may have and comes up with a mortgage amount you can sustain without exceeding standard debt servicing ratios. Unfortunately, without checking credit scores and verifying employment type(part-time, full-time, contract) you are rolling the dice as to whether you will be approved for your purchase.
Once we complete your pre-approval you will be able to answer the following questions:
1.) What is your 5 yr fixed and variable rate purchase ceilings?
Unlike a 5 yr fixed rate, a variable rate mortgage has to qualify using the Bank of Canada mortgage qualifying rate. The qualifying rate is normally quite higher than the 5yr fixed rate mortgage and will reduce the borrower’s purchase ceiling. More information on the qualifying rate can be found here.
2.) What is your credit score?
If you are in the market to purchase a home, you need to know this. Your credit score(usually between 300-900) enables the lenders and insurers to assess your credit worthiness. For example, if you have a credit score under 600 then you would not qualify for a high ratio mortgage and would need to have access to a larger down payment, usually 20%. More information on credit scores can be found here.
3.) Will you have a high ratio mortgage or a conventional mortgage?
A high ratio mortgage is a mortgage with less than a 20% down payment and a minimum of 5%. These mortgages are required by law to be insured by one of the 3 mortgage insurers in Canada (CMHC, Genworth, Canada Guaranty). Any appraisal required on the property is paid for by the insurer. A conventional mortgage is a mortgage with at least 20%(or greater) down payment. Most conventional mortgages require an appraisal on the property, usually paid for by the borrower.
If you have questions or need help with a pre-approval please contact us today 519-495-4281.
Thanks for reading!