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Tuesday, 18 October 2011

Pre Approved Mortgages - are they reliable?

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 - can you even afford to go shopping?:
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 - what the bank thinks of you:

In a pre-approval, your lender determines if you have the ability to qualify for a mortgage and "underwrites" your request.  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.

It is good for you to do a pre-approval because:

• you know that your bank has "got your back" in the event you actually find a house that you can afford to buy, (unlike the buyers in our example).

• the only thing left after a pre-approval is getting the lenders approval of the property, usually determined by an appraisal.  

Limit Search - how much you can afford:

Limit Search lets you know how much you can afford to spend on a house.

This is not a pre-approval nor is it a "warm and fuzzy" guarantee you will even get a mortgage. It only tells you what is the most you can spend on a house. For example, if you can afford a house but you have bad credit, then most likely you won't be approved for the mortgage. In all case, it is best to get a Limit Search and Pre-Approval at the same time.

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