A Mortgage Pre-Approval is not what you might expect it to be

Matt Chan • June 30, 2017

Although going through the pre-approval process is more important than ever, the actual term ‘pre-approval’ is often misleading. It really addresses just a few variables that may arise once in the middle of an actual offer.

The pressure in many markets has never been greater to write a condition-free offer, yet due to recent changes to lending guidelines by the federal government, the importance of a clause in the contract along the lines of ‘subject to receiving and approving satisfactory financing’ has also never been greater. (There are variations to be discussed with your Realtor around the specific wording of such clauses.)

Often clients are reluctant to write the initial offer on a property without feeling like they are 100 per cent pre-approved. An understandable desire. The risk being that many clients then falsely believe they have a 100 per cent guarantee of financing, and this is not at all what a pre-approval is.

A lender must review all related documents, not just the clients personal documents, but also those from the appraiser and the realtor as the property itself must meet certain standards and guidelines.

The pre-approval process should be considered a prescreening process. It does involve review and analysis of the clients current credit report, it should also include a list for the client of all documents that will be required in the event that an offer is written and accepted. Ideally your Mortgage Broker will review all required documents in advance, but few lenders will review documents until there is an accepted offer in place.

Clients should come away from the initial process with a clear understanding of the maximum mortgage amount they qualify for along with the various related costs involved in their specific real estate transaction. Equally as important; a completed application allows the Mortgage Broker to lock in rates for up to 120 days.

Why won’t a lender fully review and underwrite a pre-approval?

Lenders do not have the staff resources to review ‘maybe’ applications – they have a hard enough time keeping up with ‘live’ transactions.
The job you have today may well not be the job you have by the time you write your offer. (ideally you do not want to change jobs while house-shopping)
If more than four weeks pass then most of the documents are out of date by lender standards, and a fresh batch needs to be ordered and reviewed with the accepted offer.
The conversion rate of pre-approvals to ‘live transactions’ is less than 10 per cent, and this alone prevents lenders from allocating recourse to reviewing pre-approvals.

It is this last point in particular that makes it so difficult to get an underwriter to completely review a pre-approval application as a special exception. Nine out of ten times that underwriter is spending their time on something that will never actually happen.

The bottom line is that a clients best bet for confidence before writing an offer is the educated and experienced opinion of the front-line individual with whom they are directly speaking, their Mortgage Broker. Although this individual will not be the same person that underwrites and formally approves the live transaction when the time comes they likley have hundreds of files worth of experience behind them. That experience is valuable.

It is due to the disconnect between intake of application and actual lender underwriting a live file that having a ‘subject to receiving and approving satisfactory financing’ clause in the purchase sale agreement is so very important.

Without a doubt the most significant factor in recent years which has undermined clients preapprovals is the relentless pace of government changes in lending guidelines and policies. Change implemented not only by the Government also by the lenders themselves. It is very easy to have a pre-approval for a certain mortgage amount rendered meaningless just a few days later through changes to internal underwriting guidelines. Often these changes arrive with no warning and existing pre-approvals are not grandfathered.

So, while it is absolutely worthwhile going through the pre-approval process before writing offers, and in particular before listing your current property for sale it is most important to stay in constant contact with your Mortgage Broker during the shopping process.

Be aware that aside from the key advantage of catching small issues early and securing rates a pre-approval is NOT a 100 per cent guarantee of financing.

This article was originally published in the Dominion Lending Centres June 2017 newsletter.

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Mortgage Advice to Help You Through a Separation

By Matthew Chan • February 19, 2025

With the latest stats claiming that about half of marriages end in divorce and with around three-quarters of Canadians being homeowners, it’s important to know how to handle your mortgage if you decide to separate. Here’s a quick list of things to consider. Keep making your payments. A mortgage is a legally binding contract between you and the lender. It doesn’t take marriage into account. If your name appears on the mortgage, you're responsible for making sure the regular payments are made. A marital breakdown does not give you an excuse not to make your mortgage payments. If, during your marriage, you've relied on your spouse to make the mortgage payments and you aren’t certain payments are being made after separating, it's in your best interest to contact the lender directly to verify your mortgage is being paid. If payments aren't being made, it could affect your credit score or worse; the lender could start foreclosure proceedings. There is always a financial cost to break your mortgage. When working through how to split your finances, you decided to either refinance your mortgage, remove someone from the title, or sell the property, keep in mind that you will incur legal costs. If you’re in the middle of a term, the penalty for breaking your mortgage might be significant, especially if you have a fixed-rate mortgage. It’s certainly worth contacting your mortgage lender directly to verify the cost of breaking your mortgage. Having that information accessible when writing out your separation agreement will provide increased clarity. Listing your marital status as separated or divorced. When completing a mortgage application for securing new mortgage financing, when you list your marital status as separated or divorced, you can expect that a lender will want to see your legal separation agreement or your divorce papers. The lender wants to make sure you aren’t responsible for support payments. So if you haven’t finalized the paperwork, expect delays in securing mortgage financing. It could be harder to qualify for a new mortgage. With the separation of assets also comes the separation of incomes. If you qualified for your existing mortgage on a double income, you might find it hard to maintain the same quality of lifestyle post-separation. This is where careful planning comes in. Working closely with your independent mortgage professional will ensure you understand exactly where you stand. You’ll want to put together a plan for how to handle the mortgage on the matrimonial home. Purchasing the matrimonial home from your ex. There are special considerations given to people going through a separation to buy out the matrimonial home. Instead of looking at the transaction like a refinance where you can only borrow up to 80% of the property’s value, lenders will consider one spouse buying out the other up to a 95% loan to value ratio. This comes in handy when dividing assets and liabilities. Navigating the ins and outs of mortgage financing isn’t something you have to do alone. If you're going through a separation and you’d like to discuss all your mortgage options, please connect anytime. It would be a pleasure to walk you through the process.

What is a Second Mortgage?

By Matthew Chan • February 12, 2025

If you're not all that familiar with the ins and outs of mortgage financing, the term "second mortgage" might cause a bit of confusion. Many people incorrectly assume that a second mortgage is arranged when your first term is up for renewal or when you sell your first home. They think that the next mortgage you get is your "second mortgage." This is not the case. A second mortgage is an additional mortgage on a single property, not the second mortgage you get in your lifetime. When you borrow money to buy a house, your lawyer or notary will register your mortgage on the property title in what is called first position. This means that your mortgage lender has the first claim against the sale proceeds if you sell your property. If you happen to default on your mortgage, this is the security the lender has in repossessing your property. A second mortgage falls in behind the first mortgage on your property title. When you sell your property, the lawyers will use the sale proceeds to pay off your mortgages in sequence, the first position mortgage is paid out first, and the second mortgage is paid out second. After both mortgages are paid off completely, you get the remaining equity. When you secure a second mortgage, you continue making payments on your first mortgage as per your mortgage agreement. You must also then fulfill the terms of the second mortgage. So why would you want a second mortgage? Well, a second mortgage comes in handy when you're looking to access some of your home equity, but you either have excellent terms on your first mortgage that you don't want to break, or you’d incur a huge penalty to break your first mortgage. Instead of refinancing the first mortgage, a second mortgage can be a better option. A second mortgage is often used as a short-term debt consolidation tool to help provide you with better cash flow. If you’ve accumulated a considerable amount of high-interest unsecured debt, and you have equity in your home, you can secure a second mortgage to lower your overall cost of borrowing. If you'd like to know more about how a second mortgage works, or if you'd like to discuss anything related to mortgage financing, please connect anytime!

Unsure About the Housing Market? Let's Talk.

By Matthew Chan • February 5, 2025

If you’ve been thinking about buying a property, whether that be your first home, next home, forever home, or a home to retire into, the current state of the Canadian economy might have you wondering: Is this really the right time to make a move? There is certainly no shortage of doom and gloom in the news out there. The truth is, that’s a tough question to answer in the best of times. It’s nearly impossible to know for sure what’s going to happen next with the housing market in Canada. It could heat up or it could cool down. So here’s some advice. Instead of basing your buying decision entirely on external market factors, like the economy or housing market, consider looking for the answers internally. When you stop looking at the market to determine your timing to buy a home, and instead examine the personal reasons you have for wanting to buy a home, the picture can become much clearer. Here are some questions to consider. Although they are subjective, they will help bring you clarity. Ask yourself: Does buying a property now put me in a better financial position? Do I make enough money now to afford a new home and maintain my lifestyle? Do I feel confident with my current employment status? Have I saved enough money for a down payment? How long do I plan on living in this new home? Is there any scenario where I might have to sell quickly and potentially lose money? Does buying a property now move me closer to my life goals? Do I really want to buy now or am I just feeling a lot of pressure to just buy something? Am I holding back because I'm scared property prices might drop soon? There’s no doubt that buying a home can be stressful, but it doesn’t have to be. Having a plan in place is the best course of action to help you make good decisions and alleviate that stress. If you’d like to have a conversation to discuss your plans, ask some questions, and map out what buying a home looks like for you, we can address many of the unknowns together. The best place to start is to work through a mortgage pre-approval. There is no cost for this service, you’ll learn exactly what you can qualify for, and it will provide a lot of clarity about your situation. You might decide that it’s best to wait before buying, and that’s just fine. You might find that now’s a perfect time for you to buy! If you'd like to talk, please connect anytime. You’re not in this alone. We can work through everything together.