A Pre-Approval Is Not Really a Pre-Approval

Aug 27, 2015

Not Really a Pre-Approval There is a misconception out there that once you’re pre-approved, you’re good to go. A pre-approval simply means that based on your CURRENT income, expenses, down payment and credit you SHOULD be able to get fully approved once you find the right property (this is the first half of the equation). Many places won’t even pull a credit check (which is extremely important) and will just run a basic mortgage calculator and say “everything looks good” but that doesn’t mean anything. You leave thinking great, I’m pre-approved!
 
I always recommend that people put in a “subject to financing” clause with their Realtor when they are putting in an offer to protect them each and every time. Here’s why:
 
You could be pre-approved but the lender still doesn’t know which property you’re purchasing (that’s the other half of the equation). Let’s say you find the house of your dreams (well within the maximum price that the mortgage broker went over with you) but we find out that the house was a former grow op. In this case, very few lenders will even look at this (even if it’s been fully remediated and there’s a stamp from the city saying it’s all good) and if they do, they’ll usually require a substantial down payment and further air quality testing that you must pay for as mould spores can grow behind walls and become airborne years later. Yes this is an extraordinary example but it can also happen where a bidding war has bid up the price and the best offer (yours) has been accepted. The lender sends in their appraiser to determine the value of the property and it may come in at a lower value than your accepted offer and so you’d have to come up with more money for a down payment (which you weren’t prepared for or don’t have).
 
If you have a “subject to financing” clause in your agreement, then you have a way out and can look for another property with no issue at all. If you don’t have a “subject to financing” clause at all and you’ve already given your deposit to the Realtor (because you were under the impression that you were going to be approved), then you’re out of luck and will be stressed out and scrambling to find a lender that will help you out, even though you were technically “pre-approved”.
 
So in summary, always put in a “subject to financing clause” as that’s the only protection you have. This is much cheaper than forfeiting your deposit (and facing potential legal action from the seller) should you want to cancel your contract after the agreement has been made.
 
Better yet, contact GLM Mortgage Group and have us do a proper pre-approval and have you fully prepared for what most likely will be the largest purchase in your life!
 
Revised from dominionlending.ca.

Related Posts

Prepayment Options for Mortgages: What should you know?

Prepayment Options for Mortgages Rates, rates, rates. Mortgage Brokers answer a lot of questions, but one thing that rings very true is that people focus very heavily on rates. It would be unwise for us to say rates are not important, because they are very important...

Choosing a Mortgage That is Right for You

Choosing a Mortgage That is Right for You

Choosing a Mortgage That is Right for You When you buy a home, you may only be able to pay for part of the purchase price. The amount you pay is a down payment. To cover the remaining costs of the home purchase, you may need help from a lender. The loan you get from a...

All About Variable Rates

All About Variable Rates

All About Variable Rates Variable rates are based on Prime Rate and the Bank of Canada’s overnight rate, can cause fluctuating or static payments. These payments have cheaper penalty when breaking your mortgage. The banks generally change their prime rates a few days...