The Real Facts about Mortgage Pre-Approvals

July 15, 2013 in Legal Advice Blog

Mortgage Pre-Approvals

First, an observation: lawyers are trained to find the cloud around the silver lining.

Second, mortgage pre-approvals are a good thing. They allow you to know what you can afford when you go house shopping. They save both you and your realtor time.

If that’s the case, is there really a cloud to be worried about? The short answer is yes.

In today’s market, where multiple offers are a fact of life, many people do not include a financing condition in their offers because they have a mortgage pre-approval in hand. (They often do not include an inspection condition either, but that is a different topic). They go in firm. If the offer is accepted and the deposit is cashed, they have a deal.

The Cloud Around Pre-Approvals

Mortgage pre-approvals have 2 parts.

The first part is the pre-approved amount, which is what the Bank qualifies you for. It is the maximum amount that the Bank is prepared to lend to you, all other things being equal.

The second part is that the property which is to be the security, appraises at a high enough amount to keep the Bank comfortable. It takes a few days after an offer is accepted for the Bank to order and receive an appraisal of the property’s value. If the appraisal comes in lower than expected, the Bank will likely reduce the amount it is prepared to lend against that property.

If that happens your unhappy choices are:

  1. Come up with extra cash from your own resources (or relatives or friends);
  2. Get a second mortgage. If the Bank forbids secondary financing as many do, this will be problematic. Also, it will be expensive even if you can do it; or
  3. Walk away from the deal and in the worst case your entire deposit.

So before you find yourself in a jackpot, be conservative in your approach:

  1. Find out everything there is to know about your mortgage pre-approval from the lender;
  2. If you need extra money just in case, know how much you can expect to get and where it is going to come from; and
  3. Don’t pass on the financing condition unless it really doesn’t matter.

The foregoing is intended for information purposes only and is not legal advice.

What would you like to know more about? If you have a question that you think would make an interesting topic for a future article, please submit it to Garry.

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