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3/2/11

Mortgage 'Pre-Approval'

Q - A mortgage consultant told me that I was 'pre-approved'  for a mortgage up to $400,000 and when I found my dream home, I wasn't able to get the mortgage.  Doesn't being 'pre-approved' mean that I will get a mortgage?

A - The term 'pre-approved' is often used loosely in Canada. 

The 'non-brick and mortar' mortgage companies do not lend money.  They find lenders - banks or private individuals.  When the mortgage consultant says you are 'pre-approved', it is usually only on the basis of the information you provided verbally. There may be things in your history that you were not asked about or you might have thought were unimportant.  When you find your home and bring in your financial documents and the purchase contract, the mortgage consultant will send these to the lender for evaluation and have a credit check done as well.  It is at this stage that the lender may discover information that results in your mortgage being denied.  For example a bankruptcy years ago, credit card charges, something in the employment history or self-employment and so on. 

Unless, a credit check has been done and all your financial information has been presented and reviewed by the lender, your 'pre-approval' is provisional.

If you go to your bank ('brick and mortar') for a mortgage, it is the bank who will be the lender and they normally ask for the financial documents and do a credit check.  The bank's 'pre-approval' has greater certainty.  However, there is still a missing part - the property. 

The lender investigates you, the borrower, and also wants to be assured that the property is worth the money that is being borrowed.  To answer the latter question, an appraisal is done to establish the value of the property.

One more important fact.   Lending institutions in Canada have different lending criteria. Some may have very stringent criteria for the self-employed while others are more flexible. Some may be more comfortable with a higher debt ratio if there is good job stability and others may emphasize different factors.  If you have been turned down by one lending institution, it may be possible to get a mortgage through a different one.

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