What you should know about preapproved mortgages

By | May 16, 2015

According to websites like mortgage centre Edmonton, there are many advantages to getting a preapproved mortgage.  These include:

You’ll go into the house-hunting process with a clear idea of how much you can afford to spend.

You’ll be protected against rises in interest rates because you will have locked in your rate when you were pre-approved

Being pre-approved can give you leverage in the buying process, particularly if you end up in a bidding war situation, because you can sign on the dotted line immediately, without having to then shop around for a mortgage.

You don’t risk anything, because getting pre-approved is free and you aren’t obligated to then sign on with the lender who gave you the pre-approval.

However, despite those advantages there are other things of which a customer should be aware before deciding to go with a preapproval.

Be aware that:

Often, lenders will simply give you a rate guarantee.  That means that they will not take into consideration your qualifications for the mortgage, which means that the offer is then subject to further approval (or rejection).   If you are going to get a pre-approved mortgage, always be sure you are actually getting approved for the loan, not simply that you are locking in a rate.

It is difficult to get preapproved.  You’ll need at least 20 percent down payment, good employment records, verifiable income, great credit and a low debt load.  Unless your lender asks for documentation to prove these things, you aren’t really getting a true preapproval.

Be aware of the appraisal stage.  You’ll need an appraisal in order to get a mortgage.  Trouble is, you can’t get an appraisal before getting preapproved, because you obviously can’t get an appraisal on a house you haven’t found yet.  If it comes around that the lender’s valuation appraisal reveals that you paid more for the property than what it is worth, or that there are problems with the property, your preapproval could be rendered worthless.  Because of that, it’s always a good idea to place a financing condition in your offer.  This is particularly important if you are putting down less than 20 percent downpayment.  That will generally require you to have the mortgage insured, which can be a problem because insurers such as CMHC don’t like to consider pre-approvals.

Preapprovals aren’t 100 percent guaranteed.  You can change your fate where your preapproval is concerned.  Even after you get a true preapproval, if you add to your debt load, if you miss payments, co-sign a loan or someone or otherwise change your financial situation, your preapproval can be negatively affected.

A preapproval could end up costing you more money.  When you get preapproved for a mortgage, there’s a good chance that the accompanying interest rate will be higher than you would pay if you got your mortgage after you find the home you want to buy.  However, there’s also a good chance that the differential between those two interest rates will be lower than what you could end up paying if interest rates skyrocket and you aren’t preapproved.  What you can do is this:  Check the interest rates 30 days before your closing date, and if the posted rate is significantly lower than your preapproval rate, ask your mortgage lender to match or beat that rate.  If they won’t, you might want to consider going with another lender.