Beware the FAKE Pre-Approval
Protect yourself from the embarrassment and emotional stress of being turned down for a mortgage when you thought you were pre-approved.
Maybe you thought you did everything right. You got your pre-approval before shopping, like you were supposed to. Unfortunately, there are two things I am starting to see more often. Buyers relying on bank online pre-approval apps - and Buyers relying on branch mortgage advisors that either don't review credit reports or don't have enough experience and skip sending your application to a head office underwriter before telling you your pre-approved.
It's important for you to look for clues that a real mortgage pre-approval has been completed before you start scouring the latest MLS listings.
In very simple terms - only rely on a discussion with a live person - and - only accept what they tell you if they have reviewed your credit report and demonstrated to you an understanding of how mortgage decisions are made. If you are not 100% certain in their abilities from that discussion, get a qualified second opinion ASAP.
And, if you think this doesn't happen to folks, I was approached by three separate purchasers in the past several weeks who thought they were pre-approved but were subsequently declined by their Bank.
For one, we were able to help them by changing their overall plan and switching lenders. A second was only able to proceed because they had a cosignor that could save their Purchase. The third, a young professional, will not be able to complete their purchase. In all three cases, a significant amount of stress and wasted time could have been avoided if a legitimate preapproval had been completed up-front.
the online quick application - the cool tech solution
A number of banks have launched apps that allow you to answer a few questions and get prequalified right on your phone, in minutes. These are slick programs and they look really, really good. Unfortunately, they are only as good as the data you put in.
Mortgage policy, however, is not always clear or intuitive - which is where these early generation apps are failing.
For example, we know that what you can borrow is based on a comparison of your current debt and proposed mortgage payments compared to your income. The total of all payments can't exceed 44% of your income. Seems simple. The app asks for your income and you put in your number.
Did you know that we can't use shift premiums or overtime until we have a two year history of that income? Even then it's based on an average of your two most recent years - but only if it's increasing. Or, that if you are hired out of a union hall, your income is $0 for the purposes of mortgage ratios until you have two years of income through the hall? And, you probably realize that your "guaranteed" raise coming in six months doesn't count.
How about when they ask for loan payment amounts? If you have a biweekly loan payment, then you have to multiply by 26 payments a year and divide by 12 to get your effective monthly amount. And, if you have a student loan, not in repayment, your payment isn't $0 for mortgage qualifying. You have to include anywhere from 1% to 5% of the outstanding balance in payments, depending on the lender involved.
You get my point. Every Canadian app I have seen has a disclaimer that basically states that any information obtained is subject to bank policy and a review of documentation by bank staff.
As an aside, it is true that there are some major mortgage lenders in the US that have very popular online apps. It's a completely different world south of the border related to privacy, federal income tax records and credit agencies. The most successful American apps access personal income and debt details direct from credit rating agencies and the IRS. Privacy rules will prevent this from happening in Canada for the foreseeable future, in my opinion.
By all means, use an app to get a very rough idea - but don't go shopping until you have connected with a live person. Which brings me to my next point.
the live person mortgage pre-approval
First, ensure they review your credit report. The very first thing every mortgage lender uses, to decide if they want you as a client, is your credit report and credit score. If you meet by phone or in person with a mortgage broker or branch employee and they have not looked at your credit report before finalizing pre-approval numbers, don't walk away … run!
Second, trust your gut. This is a multiple 6-figure debt decision. Whomever you talk with needs to leave you with the clear impression that they absolutely know what they are talking about.
Ask some questions, during your discussion. For example, "how do mortgage lenders decide how much I can borrow?" or "how do you decide what my income is - because I work shift/contract/just got a huge raise/get an annual bonus?". Have enough faith in your instinct to sense if the person you are working with is speaking with authority. Any doubt? Ask your Realtor or use google to find someone to provide a second opinion.
Related to this last point, let me introduce one final thought. We all want to believe that whomever we choose to work with has our very best interests at heart. While it's true that there are some very good bank/branch-based mortgage specialists, they can only offer you their employer's mortgage. By comparison, a qualified mortgage broker has access to dozens of different mortgage lenders who are effectively competing for your business. While it might be considered unfair to expect this, wouldn't it be in your best interest for a bank mortgage specialist to recommend you also meet with a Broker so you are aware of all options available to you in the marketplace? And, yes, I concede the point that I have a biased view. I invite you to read this paragraph again and think about it.
Don't waste your time, your Realtor's time, a Seller's time or risk finding yourself in a very uncomfortable emotional situation.
Have fun with new technology but, for now, place your faith in a real person when seeking a mortgage pre-approval.
Make absolutely sure they view your credit report in the process.
And, if they don't leave you with the impression that you are speaking with an experienced expert in the mortgage space, ask the two most successful Realtors you can find (and your homeowner friends) for recommendations on where you can get a second opinion.
If you have googled "Jim Cook Mortgages", read the reviews, and want to talk about your situation, then book a discovery call.