I am a big fan of the mortgage pre-approval — in any interest rate climate. Even when mortgage interest rates are steady or falling. And doubly so when rates are creeping upwards, as we have seen in the past several months.
Because the pre-approval will hold an interest rate for you while you continue to shop or make up your mind about refinancing your home. Even if rates rise a full percentage point, your rate is protected for 120 days. That is some pretty serious peace of mind.
How do you know if you are in the pre-approval “zone”?
Quite simply, a mortgage pre-approval can be used to:
CASE STUDY: Toronto mortgage pre-approval saved thousands of dollars
A huge advantage–in this case thousands of dollars huge–to a mortgage pre-approval is that you protect yourself against rising interest rates while you are out there hunting down your dream home. Bonus!
In recent years, no one talked about this much as mortgage interest rates remained the lowest anyone could remember in fifty years, but we have experienced four rate hikes since August 2017, and perhaps one more is expected before the end of 2018.
For clients and first time home buyers Kaycee and Jayson, their pre-approval saved them a tidy sum.
A successful couple with a healthy household income, they began looking for their first home in July of this year and asked me to tell them how much mortgage they would qualify for.
Smart home shoppers know in advance how much mortgage they will qualify for, and on what terms. This allows them to narrow their search to homes which fit their buying budget and avoids wasting their real estate agent’s time as well as their own.
Kaycee was delighted to learn they could tap into over $960,000 if need be. I took an extra step and requested a formal pre-approval certificate from TD Bank. This gave them a rate guarantee for a fixed rate five-year term good for the next 120 days.
Kaycee and Jayson found their dream home last week and were able to take advantage of softer prices and bought for “only” $860,000. Not only did they save a ton of money this way, but that same interest rate has since gone up by 0.5%.
By requesting the pre-approval this couple saved 0.5% on their mortgage interest rate and will have a mortgage rate that is quite simply not available today. On a mortgage of $829,000 they will save $213 with each monthly payment. This is a pretty sizeable savings of $12,780 over their term of five years.
There really is no downside to arranging a pre-approval. If interest rates had fallen by the time they were ready to buy, Jayson and Kaycee would have received the benefit of the lower rate. Now that is a can’t lose proposition.
Mortgage Pre-Approval Essential in the Toronto Market
If you are buying a home in Toronto, and some other hot markets like Ottawa, Montreal, Hamilton, and Brampton, you also need to properly prepare yourself for highly competitive multi-offer situations and a confusing array of new mortgage lending guidelines.
Toronto home prices continue to rise and with inventory in short supply, home sellers and their real estate agents are having a field day as more often than not their listing sells for significantly over their asking price. This is true all over the Greater Toronto Area (GTA).
Since late 2016, the mortgage industry has been turned upside down as mortgage rate pricing just became quite complex and can be confusing even for experienced mortgage brokers.
This is a result of federal government intervention which resulted in massive changes. Now there are several different categories of mortgage applicants, and each have their own mortgage interest rate pricing.
How can homebuyers protect themselves and put their best foot forward?
More than ever, a mortgage pre-approval just makes sense. Even though a pre-approval is not a guarantee the lender will come through when you have an actual purchase, there are many benefits.
(1) Protect yourself from further interest rate increases for the next 90 to 120 days. At the very least you will pay no more than the rate on your pre-approval certificate, and if your lender’s rates are lower when you have a live purchase, you will enjoy the lower rate.
(2) Having a mortgage pre-approval certificate for your Toronto mortgage allows you and your real estate agent to stand out from other offers in a crowded purchase process. Even if you ask for a short (say 2 days) condition of financing clause, the seller will take great comfort from your certificate, and will be less inclined to think they are wasting precious days holding your offer.
(3) Being pre-approved for your Toronto mortgage gives you a clear idea of how much mortgage you will actually be approved for. With the introduction of stress testing mortgage applications as well as tiered mortgage rates, depending on your borrower profile, this is more important than ever and also harder to predict than at any time previously.
No Big Changes After a Mortgage Pre-Approval
A pre-approval is granted based on your financial, employment, credit and life circumstances at the exact moment in time you asked. It stands to reason that if something significant changes between then and the time you actually make an offer to purchase, your approval could very well fly out the window!
But we still see this sort of thing all the time. I guess no one is telling prospective home buyers this hugely important fact.
Edib and Andrea are planning to move up to a bigger house in the next few months. When they went to their bank a while ago to understand their options, Andrea had a solid full-time office job making $43,000 per year. Their bank issued a pre-approval certificate good for 180 days.
During the holidays, they decided Andrea should cut back on her work hours to spend more time with their teenage children. She found a great new part-time job five minutes from their home and she resigned her full-time job.
Last week they braved the extreme cold to make an offer on a larger house in their neighborhood. The offer was accepted, but when they went back to the bank to formalize their mortgage, they found out they no longer qualify for a mortgage.
They had assumed the certificate they got before was all they needed, but these are never guarantees – just a declaration you should be okay if nothing changes in the meantime. (And even if there are no changes, the property itself has to pass muster)
They came to me looking for a miracle, but there are no miracles here. If they want to buy a larger home, Andrea will need to restore her employment and income to roughly what it was when the bank pre-approved them.
Similarly, a family of three (parents plus adult daughter) decided last October to buy a home and were pre-approved by their bank. The daughter went back to school full time in January and was surprised to learn their pre-approval was no longer valid. A pre-approval is never binding on the lender – EVER!
In another example, one of our clients last year quit her full-time consulting job to become a self-employed contractor AFTER her mortgage request was approved. She had waived all conditions and was committed to buying a new home in King City, and assumed that once she was approved it would be plain sailing.
Not the case. Mortgage lenders often wait to confirm employment in the last week prior to closing. This turned out to be a disaster – she was not able to close and now is being sued by the seller.
Other times we meet buyers who take out a new car loan or lease after they are pre-approved. This changes their Total Debt Service Ratio (TDSR), and may make the difference between remaining approved or being disqualified.
Last summer a couple we pre-qualified came back with an offer to purchase in the Fall. We always have to submit a fresh copy of the credit report with an application (fresh means less than 30 days old) In this case, they had each recently binged on applying for new credit with several credit card issuers. This raises red flags.
Upon further discussion, it turns out their expected gifted down payment had fallen through, so they decided to apply for credit and use borrowed money to fund the down payment. This does not spell an automatic decline – but in their case it did, since the monthly payments on their new credit cards killed their TDSR.
If you are planning to buy a new home, and you are considering making changes to your income, employment or financial circumstances, do not assume that because you were pre-approved previously that you are good to go. You’re probably not.
Mortgage Pre-Approval Does Not Last Forever
Of course, we all know that nothing lasts forever (sigh), but no one wants to find out that the timer on their pre-approval is about to expire, and with it, a much preferred lower interest rate.
We received an anxious call this week from a realtor partner whose client is distraught over his mortgage pre-approval with a major chartered bank. Four months ago they secured a pre-approval for an $800,000 mortgage at a really low two year fixed rate, and he did not realize it would expire this week.
His buyers have finally found a property they wish to buy and when they contacted the bank to share their good news, they were told their rate is no longer available. If they want the same mortgage now, the going rate for a new two year fixed rate mortgage is 0.6% higher!
Their monthly payment will increase by $246…OUCH!
What went wrong?
Typically mortgage pre-approvals hold the interest rate for 120 days. That is usually enough time for buyers to find their ideal home. If you are buying from a builder, with a longer closing period, you can arrange a far longer pre-approval, but the rate will be much higher than best rates available in the near term.
Our friend’s clients thought that as long as they submitted their final purchase application within 120 days they would be fine. But no, the actual purchase must fund within 120 days. That’s a big difference.
When you consider most offers to purchase close 60 to 90 days after the offer is accepted, then you really only have 30 to 60 days after you secure your pre-approval to find the home you want.
In recent years, this would not have been a big deal, as mortgage rates have been at record lows for quite some time. But since August of this year, the Bank of Canada has raised its overnight rate twice already, with more increases in the forecast before year end.
Along with this came mortgage rate increases. Variable rate mortgages are now 1% higher than they were a year ago, and five-year mortgage rates have actually increased even more — at least 1.0%.
What could have been done?
Mortgage brokers typically know about pending rate increases before anyone else. And often they are given a friendly warning that their lenders are planning to increase their rates at midnight that night.
At Ross Taylor & Associates we notified all of our pre-approval clients who we thought might be affected, and suggested they either step up their buying efforts, or we re-apply for a mortgage pre-approval and reset the clock to a new 120 day period.
Had this been done here, our friends’ clients would have opted for a new pre-approval would have neatly extended their rate hold-out three months beyond where it currently sat.
The lesson here is to pay close attention to what is going on around you and be prepared to adapt to new information. It’s hard to do that with our busy lives, so do your family and yourself a favour and work with professionals who live and breathe this stuff, and who will be thinking of your best interests …even while you sleep.
Will a Mortgage Pre-Approval Affect My Credit Score?
Dear Ross, we are looking around for our first home, and we want to know how much mortgage we will qualify for. If we ask for a pre-approval, will you have to check our credit history? Is that a ‘hard inquiry’, and will it reduce our score?
My answer is yes, if we do a formal request for a pre-approval, with your permission, we would access your credit reports, and submit these with the application. It is a ‘hard inquiry’, so it may have a minor effect on your score, which is one reason why you should be stingy when it comes to applying for credit and allowing people to check your credit history.
Keep in mind, if you make an offer to buy a home fairly soon after, we can use the same credit report twice, so no harm no foul.
But please understand that no mortgage pre-approval is binding on the lender. It is not an absolute guarantee. Lending guidelines can suddenly change, and so can your personal circumstances.
Most of the time, I am able to assess the strength of an application and advise you whether or not you would qualify for a mortgage without having to submit a pre-approval request. And if I’m not sure, I’ll tell you and we can submit in advance to a lender.
Mortgage Renewals and Pre-Approvals
If your mortgage is coming up for renewal in the next several months, you can expect to hear from your mortgage lender sometime soon. It used to be they would send you a letter spelling out your term and rate options — inviting you to select the one you like best and return the form.
More often these days, renewing lenders are not putting their rate offers on paper — since it gives you carte blanche to shop the rate around for something lower and better. Instead, the trend is to invite you in for a friendly little office chat… probably with coffee, so that part is good.
Either way, this is a perfect time for you to dip your toes again into the market and see what else is out there. Plus, you can lock up a rate for 120 days with a pre-approval while you do your shopping.
Then if rates do spike upwards around your renewal date, you can take comfort that you have a killer rate already in your back pocket. Sweet!
Even with a small rate bump from 3.59% to 3.84%, a pre-approval can save over $5,400 in monthly payments for a $500,000 mortgage! No small potatoes!
So, if you are thinking of buying a home, your mortgage is coming up for renewal, or maybe you want to refinance your mortgage, it makes sense to give us a call at AskRoss.