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Pre-Approvals

What are the advantages of a pre-approval?

  1. You know what you can afford in terms of qualification and for personal budgeting.
  2. It helps in the purchasing process with realtors and buyers because they know you’re serious.
  3. The interest rate can be held for up to 120 days.
  4. There is no cost or obligation

What is a pre-approval?

A pre-approval is a preliminary discussion with a potential mortgage lender to find out the maximum amount they will lend you and at what interest rate. With a pre-approval, you can do the following:

  • Lock in an interest rate in case interest rates rise before you purchase a home. The length of the interest rate guarantee varies by financial institution and usually ranges from 60 to 120 days. 
    If interest rates fall before you purchase a home, you may or may not be able to get the lower rate, depending on the lender’s policies for pre-approvals. 
  • Estimate your mortgage payment, so that you can include it in your budget.
  • Know the maximum amount of a mortgage that you qualify for, so that you don’t waste time looking for homes that are too expensive.

Contrary to what some may lead you to believe, a pre-approval does not guarantee that you will get the mortgage loan. Once you have a specific home in mind, the lender will want to verify that the home or property meets certain standards (such as the condition or market value of the home) before approving your loan. At that point, the lender could decide to refuse your mortgage application, even though you had received a pre-approval for a certain amount.

What’s the process?

  1. Submit a short application.

  2. Discuss on the phone or in person to confirm and clarify the application information.

  3. Your credit information will be analyzed and presented to the best lender for approval. 

What are the risks?

Valuation risk:  In many cases, a pre-approval is not attached to an actual property, meaning it’s usually received prior to making an offer on a home.  So there may be an appraisal valuation risk. For example, assume a buyer purchases a home for $500,000 and puts down 20% ($100,000) to avoid paying mortgage insurance.  If the appraisal shows a value of $450,000 then the loan-to-value ratio is actually 89%. This means the borrower must pay mortgage insurance costs and be approved by the insurer.

Insurer approval risk: A mortgage situation that has less than 20% down payment will require two approvals - one from the lender and one from the insurer. Even though a lender may look at the application and paperwork, it will not be pre-approved by an insurer at any lender - the insurer can still decline the deal.

Post approval changes: A pre-approval does not protect against changes made afterwards -- the numbers that were used for the pre-approval need to be re-verified for the actual purchase.  If there are any changes in personal circumstances, such as  changes to debt levels, poor credit repayment, employment changes , change in asset values, etc., these may negate the pre-approval.

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