Advantages and Drawbacks of Mortgage Pre-Approvals

A pre-approval’s biggest allure is its 90-day validity period without needing to reapply every time you want to make an offer on a property, giving you an advantage over anyone who doesn’t know what their borrowing capacity is. Where you have asked for a fixed rate on application, you can for a fee, also locked-in rates and it protects you if interest rates rise while you house hunt.

In the meantime, if a better value mortgage is located you’re not obligated to stick with the lender that provided the pre-approval. Keeping in mind, you’ll need to reapply and resubmit documentation if you decide to shop and change lenders yourself.

With a pre-approval in place, you should be aware that it should never be a substitute for a “subject to financing” clause in your contract of sale. That’s because pre-approvals do not constitute a final approval, which is only given by the lender when all their conditions have been satisfied.

While some lenders will validate a borrower’s qualifications and documentation during the pre-approval process, none will guarantee an interest rate except for when a fixed interest rate lock fee has been paid.

If you have successfully made an offer on that dream property, on progressing the pre-approval any number of issues could pop up, including last-minute financial validity issues, property or credit file problems. Some lenders can even use missed bill payment as an excuse to invalidate your pre-approval. Adding to your debt load or changing jobs in between getting pre-approved and progress the loan can also scare away lenders.

Getting a mortgage pre-approval can pay in a fast-paced and competitive property market, though it’s not without pitfalls, consider these before applying for one:

• Pre-approval is only valid for the lender that issues it and is subject to their lending policy only. It should never be assumed that if you received pre-approval from one lender, you will qualify for a loan with another,

• If pre-approval was issued by a broker, unless stated on the pre-approval letter, you should always assume that it’s valid with one lender only even if the broker reassures you that it covers their entire panel of lenders,

• You’ll most probably get a good rate at the time of pre-approval however there is no guarantee that particular lender will be the best value loan for you when you are actually successful in your property search,

• If you choose to get pre-approved with a lender who offered you a cash-back on settlement, beware that there are stipulations on timeframes involving when the pre-approval needs to become an actual application and settled. There is also a chance, you may lose your negotiating power and the cash back will end up being short term gain for long term mortgage pain.