Talking more about your mortgage questions!
In this video, Chris Molder, a Toronto mortgage broker, sits down to talk about pre-approvals and why a pre-approval isn’t a guarantee that you will be approved for a mortgage.
Why a pre-approval isn’t an approval guarantee
Don’t feel like watching? Find the full transcript below!
Have questions about the pre-approval process? This video is for you!
A pre-approval does not guarantee a mortgage
Chris: [00:00:00] Today, I want to talk to you about one of the most common and dangerous misconceptions about mortgages: pre approvals. There is this idea that a pre-approval equals a guarantee that your mortgage is approved. And that simply is not true because the pre-approval process doesn’t take into account two very important details that are relevant to the final outcome of the mortgage approval.
Chris: [00:00:27] Number one, the pre-approval doesn’t take into account specific risks around the property that you buy. And number two, the pre-approval doesn’t take into account changes that can happen in your life. The pre-approval is just a snapshot in time. But of course, life is wonderful. Life is strange. Things can happen. Life changes. So let’s talk a little bit about those risks and what you can do to protect yourself. With a pre-approval in hand, you may go shopping with confidence knowing that you’re qualified for the mortgage, but there are certain risks around the property itself that you are buying that you can’t account for. And there are five major risks that I’d like to cover with you.
Chris: [00:01:10] The first and most dangerous of the risks, especially in a market like Toronto where buyers don’t have any control over their financing condition, is appraisal risk. So it can happen that just because you pay a price for a property, the appraiser may not be able to confirm with market data that that is the actual price. When that happens, the lender will base their loan amount on the appraised value, not the purchase price. So if you’re buying with an assumed 20% down payment, it’s going to be 20% based on the appraised value, which is lower. So that difference in purchase price and appraised price is really a risk to the borrower, and you’ll have to find the way to fund the difference between the two values.
Chris: [00:01:58] The second big risk is around the property itself, and what we might call insurance risks. So things like the presence of asbestos, knob and tube wiring, aluminum wiring, all present challenges for an insurance company to insure the full value of your home. So many lenders may decide not to lend on the property. If there are known and identified risks like this, others may hold back a certain amount of the financing until repairs are done to bring it up to code.
Chris: [00:02:32] The third risk is location risk. So lenders have guidelines regarding which markets and which towns they will lend in. So as borrowers get pushed more and more to the outside of the GTA, they’re landing in more and more rural areas. And so not every lender will finance a new property with acreage or a property that is outside of similar city limits. So you want to be very careful when shopping for a rural type property, not to be shopping outside of the lender’s guidelines.
Chris: [00:03:10] The fourth risk that is related to the rural property is farm. So anything that has the hint of a hobby farm attached to it presents a challenge, because agricultural mortgages are a different kettle of fish than residential mortgages. So you want to stay clear of anything that has an agricultural side to it.
Chris: [00:03:35] The fifth and final risk is around condos. And when we’re talking about condos, two things are important. Number one, lenders maintain a blacklist of condos where there are known issues, specifically around the reserve fund, operating budgets, and or legal issues that the condo corporation might be involved in. And all of these things will impact the marketability of a condo, probably something you want to stay clear of anyway. But the lender may not finance, period.
Chris: [00:04:08] And secondly, condos need to meet a minimum square footage requirement. Generally, we categorize condos less than 500 square feet as micro condos, and micro condos can be financed. However, they should have a defined bedroom in the floor plans. Anything that’s an open concept or bachelor studio style condo may be problematic to finance, and lenders can be very choosy and picky about where they will finance these types of micro condos.
How can your pre-approval be affected?
Changes in employment type & debt
Chris: [00:04:42] So now that we’ve discussed risks around the property itself, we should talk about some of the changes that could happen in your life that can have a very serious impact on your pre-approval. So keeping in mind that the pre-approval is simply a snapshot in time at that particular moment about your qualification for a mortgage, between that snapshot and the need for the final approval of a mortgage, the lender will re-underwrite your application. And when they do so, they will look at changes such as changes in employment type.
Chris: [00:05:20] So if you move from an employee to a commissioned employee or an independent contractor or self-employed, that can have a serious impact on your pre-approval. Also, taking on additional debt. So if you go to buy a shiny new car, that’s going to have an impact.
Co-signing on other loans
Chris: [00:05:37] One of the most common things that we see is you trying to do a good thing to support family, co-sign for a mortgage or a vehicle, or any other type of credit. Just because you cosigned and you don’t pay doesn’t mean that your mortgage lender, when you do your application, won’t need to include those monthly payments in your application.
Protecting yourself during the pre-approval process
Chris: [00:05:59] So you want to stay clear of any major changes during the pre-approval process. And if you can’t help it, then you definitely want to communicate that to your mortgage broker or lender. If a pre-approval doesn’t necessarily mean an approval guarantee, how do you protect yourself? How do you go about making unconditional offers while that risk is looming there?
Pre-approvals are dynamic
Chris: [00:06:23] My answer is to think of it not as a static exercise, meaning that you submit documents, get the pre-approval and then forget about it. But it’s more of a dynamic exercise. You should be working very closely with your mortgage broker or banker or whoever it is that you’ve relied on for the pre-approval to have an ongoing dialogue. For myself personally, every time a borrower goes out to make an unconditional offer, I always like to review the application one more time to make sure that everything is in line and there are no changes, even though it may seem redundant. Just have that ongoing conversation to protect you as the borrower.
Helping you find answers for your mortgage matters!
My name is Chris Molder. I’m a Toronto mortgage broker. If you found this video helpful, I invite you to share it. And if you have any additional questions or concerns, I’m just a phone call or an email away. Book a call directly via my calendar below, or you can get in touch with me here.