Getting a pre-approval mortgage offers hopeful buyers peace of mind that they have an approved loan.
It is important to note that full approval will be granted once the lender completes all evaluation processes. However, pre-approvals can be amended or even cancelled if something in the buyer’s situation changes as they near the end of their application period.
Cancellations and amendments at this stage can affect closing dates and lead to other potentially disastrous effects on transactions.
Read More: Top 16 Do’s and Don’ts when Applying for a Mortgage
No Conditions in a Hot Market
When demand exceeds supply, buyers may insert a condition of financing clause into their purchase offer, giving them up to five business days to arrange mortgage financing. However, the current market trend favours sellers, not making it an even playing field for buyers.
Although pre-approval certificates provide some security, several potential factors may still lead to unsuccessful purchases. Therefore, it is of utmost importance for homebuyers to know how much mortgage they could qualify for before the purchasing process. They can do this by providing all requested information and documents to their bank or mortgage broker to begin an upfront underwriting review.
Insured Mortgage Approval
When applying for a loan that requires less than a 20% down payment, understand that you are in line for an insured mortgage. Your application must pass two approvals: the first by your lender and the second by an insurer.
While pre-approvals assess your creditworthiness and capacity to borrow, the amount you qualify for ultimately depends on the property and a lender and insurer’s assessment of your application. Note that pre-approval requests do not consider particular properties.
5 Reasons Why the Property may hurt an Approval
The borrowers and prospective properties must meet certain conditions when applying for a mortgage. A pre-approval doesn’t guarantee the eventual approval of a particular property because various factors could block the application. Understanding the lender’s requirements before searching for a home is important.
There are several reasons why a specific property can cause concern. For more information, we defer to Dustan Woodhouse, whose passionate concern for this topic inspired this article and who lists many more here.
- Value of The Home: When multiple buyers compete on the offer presentation day, there can be only one winner. The winner often has to bid much more than the market value in this market. When this happens, the appraisal may return with a value less than you paid. That will not necessarily kill your mortgage approval as long as you have additional financial resources to cover the shortfall, if necessary. Note: This market does not favour buyers who go subject-free (firm) with no wiggle room. If you use all your financial resources to create the down payment and closing costs, what can you do if the value comes back lower?
- Property Condition: Have you ever seen an MLS listing that says “as-is” or “handyman special?” Those are red flags to a lender, and a mortgage may not be forthcoming. The appraisal may further report poor conditions, mould or even structural issues.
- Property Specifics: There are many reasons a property may prove challenging. Here are some examples of property types that will seem problematic to a lender:
- Log homes
- Homes on leased land, First Nations, government or private
- Rural properties with a hint of hobby farming
- Properties containing asbestos, underground oil tanks, aluminum wiring
- The remaining economic life of the property
- Suppose the property was a one-time grow-op or drug lab. Good luck with that – no matter the price, even if the property has been remediated.
- One property earlier this year had an MLS listing that proudly mentioned a 15-foot fish pond in the backyard – with a fish farm permit. That mortgage was VERY hard to place.
- Location: If a lender feels the property you picked is too far from your workplace, they may assume you need to keep a second home or place to stay, and in such cases they impute a “shelter cost” for you. This might also skewer your approval.
- Condos: Mortgage insurers keep lists of condo buildings they do not want to lend against. The maintenance fees may seem extraordinarily high, or the condo status certificate reveals significant assessments, such as Kitec Plumbing.
The smaller the condo is, means fewer interested lenders. Many lenders do not like to lend against micro-condos. Condos under 500 square feet are often a cut-off, but in recent years that number has shrunk to 400 SF or less with some lenders. It might depend if the unit has a separate bedroom. In some of these suites, the bedroom is a wall bed/Murphy bed.
Reasons Why You Might Hurt Your Own Approval
When seeking a mortgage, it’s important to remain aware of any changes in circumstances or information that could affect the lender’s decision.
Making timely payments on all your credit cards and loans is vital while pursuing a mortgage. Deferring payments may not harm your credit score; however, lenders might be wary of providing such an amount to someone needing relief from their financial obligations. For instance, if you indicated an income level but then changed jobs midway through the home-purchasing process, this could be seen as a potential red flag.
Finally, to ensure smooth sailing throughout the process, make sure your taxes remain up to date and in good standing with CRA.
When looking for a property, it’s important to check back with your mortgage broker and adjust the pre-approval accordingly.
See if any factors might change your loan amount or disqualify you from getting an offer in the first place.
If you’re buying a condo, have an experienced real estate lawyer review the condo status certificate before accepting any offers. If you’re buying a rural property, pay attention to zoning regulations and ensure your Offer to Purchase addresses septic systems and water potability.
Consulting with a seasoned mortgage broker can give you better insight into potential risks associated with proceeding with purchase offers so that you can make informed decisions as best possible.