Real Estate

Mortgage Pre-approval Meaningless?

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  • Jan 23rd, 2021 1:01 am
[OP]
Newbie
Dec 10, 2020
6 posts
1 upvote

Mortgage Pre-approval Meaningless?

I've had several people tell me that a mortgage pre-approval is "not worth the paper it is printed on". I am trying to understand why that is.

With the market as competitive as it is, it seems sellers in my area are only looking at firm offers without a financing condition. Without the pre-approval step, how could you possibly know your fit to make a purchase offer at whatever price it may be?

I've been dealing with a CIBC mortgage advisor and he is telling me that they do a 99.99% approval with underwriters running credit reports, looking at 90 day history, the whole deal. So assuming you make an offer within pre approved price range wouldn't the only stipulation be the appraisal coming up short?
17 replies
Member
Jan 13, 2021
384 posts
888 upvotes
It is meaningless in the sense that there is absolutely no guarantee behind it. Furthermore, a pre-approval does not mandate the same credit-checking scrutiny that an underwriter would apply to an actual mortgage.

It's not just about the appraisal (though that is an important factor). It's also about how the underwriter feels about an applicant's financial situation. So in essence, a pre-approval is indeed meaningless because if you forgo the financing condition in your offer, you're basically gambling. You're betting on your chips falling where they should at the right time (closing date).

Mortgage-fraud is extremely rampant in Canada these days, so I'm sure there is "always a way" around losing such bets, but it can get very stressful.
Deal Addict
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Nov 2, 2020
1284 posts
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Obviously there is no guarantee but they give you a good idea of what you can afford. Also there is so much paperwork its better to get the ball rolling and get it done ahead of time.
Sr. Member
Jan 22, 2012
576 posts
207 upvotes
Bradford
I always think it’s best to look at your budget and figure out what you’re comfortably spending a month on your mortgage. Then take that amount and look at how much house that will buy you.

I’ve had too many friends go get a pre-approval and then purchase a house and get a shock when they see how much a month that costs.
Deal Addict
Jan 15, 2017
3929 posts
3392 upvotes
It depends on how much investigation was completed prior to issuing the pre-approval.

The reality is that the majority of people who get a mortgage pre-approval do not purchase a property. With this in mind, some mortgage professionals will simply do a quick calculation on the maximum amount that you may be able to buy and send you on your way. This type of mortgage pre-approval is not worth the paper it is written on.

Other mortgage pre-approvals will complete a review of the borrower. This includes verifying information provided, obtaining a credit report and employment details and then preparing the mortgage pre-approval. This type of mortgage pre-approval is worth it as the only thing to add to it would be details of the property once an offer has been accepted. With this mortgage pre-approval you will know exactly the maximum amount that you can borrow based on your credit profile.

Just understand that all mortgage pre-approvals and approvals will have conditions, so none are guaranteed until the conditions have been met. A great mortgage professional will discuss with you the most common conditions for your personal circumstances and can share with you any concerns that may prevent any condition from being met. This obviously requires that you are 100% completely open and transparent about your current situation. The best way to minimize the risk associated with any condition is to have all your supporting paperwork available when applying - this includes things like proof of employment (recent pay stubs, letter of confirmation, income tax returns) and proof of financials (down payment and bank accounts).

And for God's sake know your financials. Don't say you make about $70k a year when in fact you make $62k, or say that you pay around $700 a month for a car payment when it is $752.25. Take the time to know exactly what your financials are as all these little discrepancies have to be changed when the amounts are later verified and it all adds time to your final approval.
Jr. Member
Oct 6, 2020
153 posts
151 upvotes
Topher86 wrote: I always think it’s best to look at your budget and figure out what you’re comfortably spending a month on your mortgage. Then take that amount and look at how much house that will buy you.

I’ve had too many friends go get a pre-approval and then purchase a house and get a shock when they see how much a month that costs.
This. People need to stop overleveraging themselves! Run through the numbers first and determine how much you can afford with your current lifestyle...and not based on the maximum amount of loan given to you!

Like what other have said...there is no guarantee. Pre-approvals are really a rule of thumb until the documents are signed and final. So long as your financial circumstance does not change significantly, there should be no to minimal changes once you close.
Member
Dec 18, 2006
427 posts
425 upvotes
Cibc pre approval checks all your income doc and downpayment up front. Once you find your property and the mortgage amount is equal or less than the amount they approved you for, all they need is an appraisal.
Member
User avatar
Oct 31, 2019
429 posts
555 upvotes
wsard112 wrote: I've had several people tell me that a mortgage pre-approval is "not worth the paper it is printed on". I am trying to understand why that is.

With the market as competitive as it is, it seems sellers in my area are only looking at firm offers without a financing condition. Without the pre-approval step, how could you possibly know your fit to make a purchase offer at whatever price it may be?

I've been dealing with a CIBC mortgage advisor and he is telling me that they do a 99.99% approval with underwriters running credit reports, looking at 90 day history, the whole deal. So assuming you make an offer within pre approved price range wouldn't the only stipulation be the appraisal coming up short?
I think they're good if (1) you have a steady job with a steady income (ie not a contractor, entrepreneur, etc) or (2) you purchase 90% or less of what they tell you. Hopefully you've thought long and hard about what you could comfortably afford BEFORE asking the banks
Member
Nov 26, 2012
354 posts
309 upvotes
Toronto
My pre-approval at TD was done at underwriter with a full credit check, letters of employment, paystubs, T4s, and a formal letter saying I am approved to borrow $xyz subject to property appraisal and updated employment letters. The $xyz amount approved was what I asked to borrow (based on what I can spend/afford with my lifestyle). My pre-approval with the broker was a piece of paper saying I can borrow up to $abc amount using the debt ratios. I'm certain he did a credit check though. lol so yah, ymmv.

The pre-approval, even the underwritten one, is just confirmation of what you can afford to borrow IF you what you buy is a reasonable market price. If you buy a $1M home with 20% down but the appraisal lands at $700k, you are not getting a $800k loan. (this is a huge exaggeration but you get the idea)
Deal Fanatic
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Feb 2, 2014
8781 posts
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Toronto
wsard112 wrote: I've had several people tell me that a mortgage pre-approval is "not worth the paper it is printed on". I am trying to understand why that is.

With the market as competitive as it is, it seems sellers in my area are only looking at firm offers without a financing condition. Without the pre-approval step, how could you possibly know your fit to make a purchase offer at whatever price it may be?

I've been dealing with a CIBC mortgage advisor and he is telling me that they do a 99.99% approval with underwriters running credit reports, looking at 90 day history, the whole deal. So assuming you make an offer within pre approved price range wouldn't the only stipulation be the appraisal coming up short?
If people are telling you a pre-approval is "meaningless", then I would recommend not asking them for any more real estate advice.

It's 100% something you should do before you buy a property. The vast, vast majority of times, the pre-approval will be a correct estimate on the amount you can get a mortgage for.
Kevin Somnauth, CFA
Principal Broker - First Toronto Mortgage - MA (Ontario #13176, BC #X301007)
Real Estate Salesperson - Century 21 Innovative
Member
Jul 17, 2018
212 posts
117 upvotes
I did a preapproval with one broker and ended up getting a mortgage from another broker due to different rates. There is also a difference between the $ I could borrow between the two different lenders the two brokers steered me to.

In essence, the preapproval is just a "check" to see around how much money you can borrow so that there aren't any surprised so it's not meaningless. But you don't necessarily "need" it as you don't know the true rate until you get a live offer.
Temp. Banned
Apr 29, 2010
569 posts
932 upvotes
GTA
A preapproval is only useless if you have complex income stream. Aka self employed, income from dividends, high deductions in your t1, etc.


If you are a salaried professional with T4 income then preapprovals are a conservative estimate of how much you can borrow. The real mortgage amount is often higher

I was prepparoved for 600-700k but ended up with a mortgage almost double that because of my complex employment situation.

In my case preapproval was completely worthless.
Deal Fanatic
Mar 27, 2004
5374 posts
3276 upvotes
Toronto
cibc pre approval does all the checks. not sure why they are saying no legitimate.

the meaningless ones are those pre approvals from those mortgage brokers that will issue you a letter wo doing any checks and a $100 "deposit"
I know a few of them. some builders no longer accept those.
Full-time Realtor
Deal Addict
Oct 27, 2012
2252 posts
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Toronto
lolbeast wrote: A preapproval is only useless if you have complex income stream. Aka self employed, income from dividends, high deductions in your t1, etc.


If you are a salaried professional with T4 income then preapprovals are a conservative estimate of how much you can borrow. The real mortgage amount is often higher

I was prepparoved for 600-700k but ended up with a mortgage almost double that because of my complex employment situation.

In my case preapproval was completely worthless.
Ditto on this.
Newbie
Nov 9, 2020
54 posts
31 upvotes
Pre approval is good in the sense that it can narrow down the neighbourhoods you can/can’t look at based on your situation. If you got pre approved for $1M, and assuming you don’t got gold bars buried somewhere, then you CAN’T be looking at Bridle Path. If your situation changes; eg income change, family change, then your pre approval might change.
Banned
Jul 10, 2020
193 posts
148 upvotes
WOW
The amount of misinformation in here is insane.

1) Don't post if you don't know anything about the mortgage industry.

2) @wsard112 the people that are saying pre-approvals aren't worth anything, are the people that are referring to pre-approvals used to make offers on PRE-CONTSTRUCTION homes/condos. This is because your pre-approval today, will not be valid in 3 years from now when the home is completed.

However, pre-approvals for today, to buy a house today, are very valid. In pretty much all cases, a bank, or a broker, will not run your credit application without all of your financial information. The credit hit for a pre-approval is the EXACT same as a regular mortgage application. It's exactly the same thing. The only difference is that you don't have an offer in hand. Once you have an offer, and the home is appraised (electronically, or, from an appraiser), then your approval is firmed up.
But everything up to the appraisal of the home is the REAL DEAL.

Note: someone said something about underwriters...: if the bank/broker works with underwriters, giving you the pre-approval means that this has already been discussed with underwriters.

No one is going to give you a pre-approval letter, if you haven't given the bank income documents, and the bank hasn't run their due diligence on you to qualify for said mortgage. That being said, until funds are advanced, you could be scrutinized if lending apettite changes.
Sr. Member
Jan 22, 2012
576 posts
207 upvotes
Bradford
How accurate are the mortgage affordability calculators online?
Trying to get a rough idea of what we can afford to spend if we sell our house.
Just want a rough idea. Would spend well under the approval.
Member
Oct 12, 2005
445 posts
385 upvotes
Lower Mainland BC
Topher86 wrote: How accurate are the mortgage affordability calculators online?
Trying to get a rough idea of what we can afford to spend if we sell our house.
Just want a rough idea. Would spend well under the approval.
The “Canadian Mortgage App” (green house logo) is the best one I’ve seen. It takes into account GDS/TDS amounts, etc. Good for an estimate before you go ahead with an actual pre-approval.

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