If you have a pre-approval, it doesn’t mean you will get a mortgage

We are getting this question every day – Can I get pre-approval and go firm, without financing condition to have better chances winning bidding war?

It looks like many Canadians truly believe that a mortgage pre-approval means they will definitely get a mortgage.

However, a mortgage pre-approval does not guarantee you a mortgage. The lender will need to review the property you’ve chosen, the documentation you’ve provided and set all the terms before you get approved.

Meanwhile, homebuyers tend to ignore the fact that there are still certain uncertainties with a mortgage pre-approval, and sometimes they lead to undesirable consequences.

Making an offer without conditions at a red-hot real estate market

In the past, when a market supply equaled or outpaced the demand, buyers included a clause in their offer requesting five business days to organize mortgage financing (the so-called “condition of financing”). The deal is that even 1-2 days matter in such cases.

Now, when residential housing market is overheated in Canada, purchase offers tend to be firm, not including such conditions.

The home buying process is much more profitable these days for the sellers, while buyers, especially first-time ones, are risking every day, as it’s often the only way to win a bidding war.

Quite obvious that it’s necessary for the buyers to know in advance how much mortgage they may qualify for. They provide a bank or a mortgage broker with all the information, documents and access to reviewing their personal finances and credit. But even after that, when they have a mortgage pre-approval, there are still many things that can make it more difficult for them to get a mortgage.

Let’s suppose you’ve applied for an insured mortgage with a down payment of less than 20% of your purchase price. Your mortgage is approved twice: by a lender and by an insurer. Note that mortgage insurers do not see your pre-approval request.

When getting pre-approved, you have your personal creditworthiness and borrowing capacity checked. The real amount you qualify for also depends on the real estate you want to buy and the lender and insurer’s assessment of your application. It’s important to understand that pre-approvals do not consider the specific real estate unit.

In order to get a mortgage, the borrowers and the properties they’ve chosen need to pass a test. When you are pre-approved, no one knows yet what property you will choose. And that’s the deal. A certain property may affect your chances to get a mortgage.

Here are some of the reasons why a certain property can lead to additional difficulties:

1. Home value. When several buyers provide a purchase offer on the same day, there can be only one winner. Amid the current market’s conditions this winner has to offer a price exceeding the home’s value significantly. In this case, the appraisal may report a value which is lower than you’ve offered. If you have extra funds to cover the difference, it may not necessarily be a problem, but what if you don’t? Today’s market does not favour buyers who use all their financial resources for the down payment and closing costs.
2. Property condition. If you’ve ever seen listings including such phrases as “handyman special” or “as-is”, know that these are points of concern for lenders. They may give you a rejection, or the appraisal may report bad conditions, mold or structural problems.
3. Property specifics. There are numerous reasons why a property may seem problematic. There are even certain types of real estate which are quite challenging to get a mortgage for. For instance:
   • Log homes
   • Properties on government, private or leased land, homes on the lands of First Nations
   • Rural homes with a possibility of hobby farming
   • Homes with asbestos, underground oil tanks, aluminum wiring
   • The remaining economic life of the real estate
   • In case the property once was a grow-op or a drug lab, the chances are close to zero, even if you have more than enough funds and the property has been fixed.
   • This year, we’ve seen a property listing that mentioned a 15-foot fish pond in the backyard with a fish farm permit. It was EXTREMELY hard to get a mortgage for that.

1. Property’s location. In case a bank sees that a property you want to buy is too far from your workplace, it may decide you need a second home and add a “shelter cost” for you.
2. Condominiums. Mortgage insurers have lists of condos they don’t want to work with. The maintenance fees may look extremely high or the condo status certificate shows significant assessments (e.g. Kitec Plumbing).

   Moreover, not so many lenders are interested in lending against micro-condos. Condos under 500 sq.feet often get a rejection, but recently this number went down to 400 sq.feet or less. It may also depend on whether there is a separate bedroom in a condo. In some cases, the bedroom is just a wall bed.

In addition to it, your mortgage may not be approved because of you. Maybe something has changed in your financial conditions or new information has appeared.

It’s always a good idea to be careful with any possible changes during the buying process, as a new car or a new job may change your image for the lender.

Another important thing to keep in mind is making sure your personal taxes are up-to-date and in good conditions. You need to pay all of your credit card bills on time.

It’s certainly not recommended to defer loan payments, even if it’s mutually agreed. Such things will not affect your credit score directly, but the bank will definitely have an extra thought on whether it wants to lend money to a person who needs a break from loan payments.

When you find a specific property, first of all, ask your mortgage broker to include the property’s specifics into your application. Make sure you understand what your mortgage pre-approval means. What factors may lead to a lower loan amount or deprive you of a mortgage at all?

Review your personal finances, ask your mortgage broker to explain how your debt service ratios are calculated, and see whether your credit history and employment status remain acceptable. It’s important that your income is easily understood, particularly, if you earn bonuses, overtime, commissions or have non-standard working hours.

In case you are purchasing a condo, ask your real estate lawyer to review the condo status certificate in advance and report any issues if there are any.

If you’ve chosen a rural property, address the septic system and water portability in your Offer to Purchase. And, of course, don’t forget about checking the zoning.

Ask your realtor for an up-to-date market analysis of the property’s value and determine your ability to withstand a lower-than-expected appraisal value.

Often, experienced mortgage brokers can tell you whether there are certain risks to your approval and if they are worth the trouble. They can tell you the possible concerns so you can make a reasonable and informed decision. It’s always only your decision. If you are ready to go firm, you need to understand what you are signing up for.