Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Facts about mortgage PreapprovalFor many home buyers out there, shopping in a tight market is a very stressful and difficult task. To add to that if the buyer does not know the limit of his or her borrowing ability then it is like a blind date. You may end up liking the house but your lender may not like your financial scores.

It is actually a very good idea to find out prior to shopping that how much you may qualify for.

Now, comes the question of qualification. Qualification is simply to know how much approximately you can afford to purchase a house. To know your qualification number you simply sit down with the mortgage broker or an agent, may be a bank mortgage specialist and discuss with them your mortgage affordability. They will quickly calculate your Gross Debt Ratio and Total Debt Ratio. Then they will compare that with lenders requirements. Depending on your requirements and income – you will be advised of your borrowing limit. Pre-Qualification is as simple as that.

Pre-approval is little bit more detailed. It involves a little bit of paperwork, more than pre-qualification process (pre-qualification generally does not require any documents from you).

In the process of preapproval the best part is that you secure an interest rate. So, in a preapproval you know how much you can afford and you also know how much will be your monthly payment. Obviously, that interest rate is normally higher than prevailing market rate  because the bank or lender is unaware of the risk.

Technically, preapproval is a win-win situation for a borrower and the lender – if the rates go up after the preapproval and at the time of closing. If the rates have gone up at the time of closing then the borrower benefits from the past secured lower rate. For the lender, having given an approval at a higher rate – it brings home some extra cash. Generally banks secure fundings for deals that are not committed yet. This is how they get the benefit from preapproval.

When the rates do not go up, rather go down – is a lose-lose situation for both, lenders and borrowers. No borrower in his right mind will go for a higher rate while he has access to lower rates. Therefore they start to shop around. And it is highly likely that they will end up with another lender. So the first bank who issued the preapproval has lost money in terms of its efforts that went in vain.

The current market situation is not favorable for banks to issue preapprovals. Big banks like the big five or big six in Canada and some broker channel lenders are still issuing preapprovals. Probably, knowing full well that some of the deal may not close.

To a borrower, getting a preapproval – when the rates are not going anywhere – maybe a little bit overkill. In a stagnant rate market a simple prequalification should suffice.

Think about it this way, when you submit an application for preapproval your credit report may get pulled. You may buy the home a month from now or four months from now. If you are late than more than three months in making a decision about purchasing a home then your credit report needs to be pulled again. If you know that the rates will not change significantly and your purchase may not happen right now than think twice before asking for preapproval.