Mortgage Pre-Approval and why it is important when buying a home...

Introduction
  • I bet, you hear it from every single Realtor® - get your mortgage pre-approval ready before starting looking for homes. And yet for some reasons, people often believe that being pre-approved is just an unnecessary annoying step that involves extra hassle. After all, why would you need to go through a pre-approval process when there are so many mortgage affordability calculators on the web? Just plug in your numbers, and get a rough idea of what you can qualify for based on your family income!
  • Reality is a little more complicated. The mortgage rules change continuously. Since the year 2017 the mortgage qualification rules have changed substantially, and the interest rates have been raised three times by the Bank of Canada. As a result, many people who would qualify for higher mortgage amounts in the past, may not qualify for the same mortgages today.

Imagine this situation:
  • You started working with your agent a couple of month back. At that time, your agent asked whether you are pre-qualified for the mortgage. “Sure. Our family is qualified for $500,000 based on our income,” you answered referring to one of the mortgage affordability calculators you had found online.
  • Now, after two months of searching, visiting houses, and looking for a perfect home for your family you have finally found one! Everyone in your family is excited! Your agent helps you prepare the purchase contract, and the sellers accept it. You are in the pending stage now – steps away from calling this perfect home yours. Surely it is time to apply for your mortgage!
  • You visit your bank and speak with one of the clerks at the reception who tells you what paperwork needs to be submitted.
  • "Is it really going to take a couple of weeks?" you ask.
  • "It depends on the application. Some applications may take even longer."
  • "But our financial condition will expire in a week."
  • "You may need to extend it," answers the clerk to your disappointment.
  • So you collect all necessary papers (bank statements, tax returns, letters from employers, etc. whatever may be required) and rush back in the bank. Then you wait... And wait for your mortgage approval. By now, you've had to extend the financial condition date since your approval takes longer than you anticipated. The sellers are asking whether you are going to waive the condition soon since they have heard from other interested buyers already. They tell you they are not going to give you an extension the second time. The stress and frustration are accumulating. What seemed to be an exciting and joyful buying experience becomes a nightmare for you and your family.
  • Finally, you hear from your bank - based on your family income and debt level, you have been approved for $400,000 – one hundred thousand less than you have hoped for. Now you would have to find extra $100,000 to cover the difference, or to walk away. Unfortunately, your family does not have extra $100k and the deal collapses. You were so close from calling this house yours. Goodbye dream home. So much for all the time wasted to find it.
  • Does it sound familiar? Have you been in this situation before? Unfortunately, this situation is not that uncommon. Many people get caught in this trap.
  • Can all uncertainty and frustration of waiting to be approved for a mortgage be voided? You bet! Get pre-approved!

Pre-approval
  • The pre-approval process is very similar to the actual approval. You will be required to produce all necessary paperwork to support your application. But since it is done prior to submitting an offer, you know exactly the mortgage amount you are pre-approved for, the interest rate you will be paying, and all other terms of your mortgage.
  • Mortgage pre-approval and the rate is usually valid for 90 days and often can be extended so you and your family have peace of mind when shopping for homes.
  • The benefits? A solid pre-approval makes removing the financial condition a breeze. The lender has all your financial information on file, and all that is left is to verify that information is valid at the time of the purchase. Another benefit is that the pre-approval paper is a strong tool when it comes to negotiations. Sometimes, when there are several purchase offers on the table, the sellers may choose to go with the offer that has no financial condition even though the offered amount is smaller (Note: this situation is uncommon in Edmonton due to the nature of its real estate market at the time of writing this blog, but it may happen in hotter markets).

Choosing your lender
  • How to choose your lender? There are two major categories of lenders that consumers usually know about: banks, and mortgage brokers. Some choose to apply for mortgages with solid financial institutions such as their bank. Others prefer to shop around for the lowest interest rate through a mortgage broker who has access to a variety of lenders.
  • While choosing a lender, keep in mind that the interest rate is only one variable in the equation. There are others that you need to pay attention too: mortgage type (open vs. closed), interest rate type (fixed vs. variable), mortgage terms (such as payout penalties), etc. Discuss them with your lender and carefully weigh the benefits and the drawbacks of each one.
  • If you choose to go with a particular bank, I recommend to talk to a mortgage specialist. Unlike regular clerks, these professionals specialize in only one type of banking – mortgages. They will share all their knowledge and information about mortgage applications with you so you are completely prepared. Some mortgage specialists (mobile mortgage specialists) can even travel to your home or any place of your choice for your convenience.
  • Don’t have a mortgage specialist or broker in mind? Give me a call! There are several highly qualified mortgage specialists and brokers on my team, and I will be happy to recommend them to you. Call my cell: 587-501-6517.

History of the word “mortgage”
  • The word “mortgage” comes from the medieval British feudal system when it became common to secure loans by the right of the ownership to the land. The lenders kept the Title to the land, while the borrowers possessed limited rights to use the land. If the debt was repaid, the borrower would receive the Title with all the rights of the ownership. The borrower could also sell the lend to pay the debt to the lender.
  • If the debt payments were in arrears, the lender could exercise the right to take possession of the land and all previous payments made by the borrower would be forfeited.
  • The word “mortgage” is made of two French words, “mort” that means dead, and “gage” that means pledge (in this case, the pledge to forfeit something of value if the debt isn’t repaid). Literally, mortgage is a “dead pledge.” If the debt isn’t repaid, the property becomes forfeited or “dead” to the borrower. On the other hand, if it is repaid in full, the pledge itself becomes dead.

Kirill Alemaskin,Edmonton Realtor® with MaxWell Polaris Realty