What's the difference between a mortgage pre-approval and mortgage approval? What are criteria to get each? Who do you need to get approval from? In this episode, we discuss the differences between the two approvals and their requirements. We also look at examples of why a bank might not give approval and what happens if you get declined by a mortgage insurance provider. Finally, we see if you can switch lenders after pre-approval and reasons to make the change.
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What we discussed:
Karl Yeh:
Hi everyone. I'm Karl. Welcome to another Homebuyer's School video, a channel where you get the latest strategies, tactics, and tips from home buying experts. And remember, if this is your first time on this channel and you want to get the latest strategies from the experts, hit the subscription button below. Hit the little [00:00:30] notification bell so you don't miss anything.
So today, I'm joined by Mujtaba Syed, Mortgage Specialist with the Bank of Montreal.
And the question we're gonna answer today is:
What is the difference between a
pre-approval and an approval?
I know there's some confusion about, hey, if I've got pre-approved, I should easily get approval, which is not always the case.
Mujtaba Syed:
It could be the case sometimes, and it could be not the case at all. Right?
So what a pre-approval does that we approve you as an individual, as a couple, whoever looking at buying a home as themselves. [00:01:00]
Now, final approval will come when you find the property, which is one the five C's of credits that we talked about, which is collateral, which is a very, very important part of it, because that is what the bank is using as security.
So, final approval will consist of actually approving you and the property now, as well. Now, if the bank doesn't like the property, don't take that as any slight against you.
It could just be the fact that hey, the bank don't like the property.
Some other situations has happened in worse circumstances where you get pre-approved, you find the property, the property's approved, but [00:01:30] you also don't get a final approval because it's subject to insurance approval, which is what we talked about, which is CMHC approval, Genworth approval, Canada Guaranty approval.
When you're putting less than 20% down, it has to go through approval twice. One will be with the bank, and then the next one will be the insurance provider.
And the reason why their approval is so important is because they're actually providing insurance on the amount that's borrowed.
So without the insurance approval, we can't do anything. So you might've been pre-approved, but we also cannot send ideal to the insurer without having a property [00:02:00] in place, because they don't look at just pre-approvals.
The bank will look at the pre-approval, you find the property, and then we send it to the insurer for an approval, and they might come back and they might not like the deal.
But they might come back to you and then say, "Listen, we need to restructure this deal. Restructuring this means let's change the dynamics of this deal. Let's add a little bit more down payment. Let's pay off some more debt. Let's add a cosigner, let's add something else."
So they'll might come back to us with a lot of options, and usually, they do.
And in a good scenario, we'll still get an approval done that way. [00:02:30] But they could come back and just not like the file at all.
But we do have our options, right? So we do have access to three other insurance companies.
What if you get declined by a mortgage insurance provider?
Clients will ask me, "We got declined for one. Is there a good chance we get declined from the other one?"
And I would say, "Not necessarily."
Every insurance provider, even though they have certain guidelines to look at, their underwriting practice is a little bit different.
So it's always worth trying it with all three insurance to see where it fits.
Now, if all three of them don't want to get approved, then unfortunately, you're out of options at that time, and then maybe we just have to wait a little [00:03:00] bit.
We can do some low credit coaching at that time, maybe a little more saving down payment, and then get you back into the whole buying process again.
It might be very disheartening to didn't get the approval that you were looking for, but the second time around, the chances are a lot higher of you getting approved, because now, we've mitigated any of the risks that your file has.
The approval process, it's different, and it varies per circumstances, and per clients, and insurance companies.
Karl Yeh:
And if you want to know more about mortgage insurance, I'm going to leave [00:03:30] a video up here and in the description below as well.
Why a bank might not find a property desirable to grant a mortgage approval
When you mentioned a bank doesn't like a home, you might have to get another lender, what does that mean?
Mujtaba Syed:
So technically, one of the most important things of the five C's of credit is collateral, right?
So this is technically what the bank has for security for the money that they've lent to you.
Now, if that is a home, that's not going to last 25 years, right? Let's say the life of the loan is 25 years, but the bank has an idea of this house is going to fall apart in 20, there's years of risk there [00:04:00] that ... What happens if the house falls apart and you decide not to pay your mortgage?
Karl Yeh: There's no collateral.
Mujtaba Syed:
What is the bank going to do for those five years, right? There's not a lot they can do.
Or the fact that they might come out and they find out, I've had a situation before where a client was getting an amazing deal on a house, right? And we found out it was a grow operation.
So what a grow operation is, unfortunately, is somebody who was doing some illegal activities in the house and they were growing something that shouldn't have.
But usually, when it is a grow operation, a grow op, there's usually a lot of mold issues, right? [00:04:30] So it becomes a hazardous place to live.
So when a bank finds out about that, they're not going to want to lend to that no matter how strictly sound the house is. Because there could be a lot of underlying issues that you're not going to fight that could be unhealthy even for you, for your family, for your children, whatever it is. It becomes a health hazard. They might not like it for that reason.
There might be another situation where, let's say, they find a house and they feel like it's overvalued.
So that means that the collateral is not ideal. So let's say someone's selling a house for 400, but the appraisal only comes out at 350.
Why would the bank [00:05:00] lend something that the value's just not there? And on top of that, to bring that to your attention and bring and say, "Why would you want to buy something that you're overpaying by $50,000? We just don't see the value there."
There's multitude of reasons why they don't like a property. But the biggest reason is, it doesn't fit their criterias for a collateral. It's not good enough for them to put their security on so they can actually recoup their costs in a worst case scenario.
Do you have to go through the approval process again with another lender?
Karl Yeh:
So if the bank doesn't like the collateral, the home that you have selected, and if you go to another lender, [00:05:30] do you have to go through the entire process again, get a pre-approval, get approval, or you just, you're at the approval stage?
Mujtaba Syed:
In most cases, when the lender doesn't like the collateral, clients stay with that lender, and then they might agree with the lender and say, "I don't like this collateral either."
Karl Yeh: Oh, okay.
Mujtaba Syed:
Right. And they might just go and find a new home that actually fits their needs and fits the bank's needs. And you go ahead.
In very seldom chances will clients absolutely love that house and they don't agree with the bank's reasoning for not.
Then yes, they can go to a different bank, and they will have to go through the whole process all over [00:06:00] again, and then you start doing that. But it's very seldom that happens.
For a bank not to like a collateral, it has to be significant, and if they actually provide that information or proof to you, if it makes sense to you, then you would also not want to, right? Because it is also your investment as well, not just the bank's.
Karl Yeh:
Can you switch a lender after
pre-approval?
Mujtaba Syed:
Yep. Absolutely. Yeah.
So, a pre-approval, once again, right, it's just tied to you. It's not attached to a property. You can even switch lenders for a final approval.
Let's say you're building a brand new home, [00:06:30] and your build process is taking 10 months. You struggle with your bank and then you realize later on, the rates are not the best with this lender. You don't like the terms and conditions, but you haven't signed anything yet. Right?
You haven't signed the dotted line until 10 months, you can switch your approval within that 10 month period. You have time to do that.
So you are not locked in until literally your first payment is reduced, or until the bank actually lends out money for that transaction to be closed.
I've seen some extreme cases where clients have switched at the very, very end, [00:07:00] at the lawyers.
The lawyers have two sets of documents from two different lenders, right? And then they'll ask the client and say, "Which lender do you want to go with?" And then we'll tell them, and then the other lender just kind of steps away.
So it really just depends on a case by case scenario. But you can switch until the mortgage is advanced. If the mortgage is not advanced, you can switch to a different lender at any time.
Reasons to switch lenders
Karl Yeh: What are some reasons you would actually do that?
Mujtaba Syed:
It could be the fact that you were uncomfortable with their rate, right? The lender is not looking at budgeting at the rate.
You find that the other lender [00:07:30] is wanting to be more flexible with their rate, and you feel like they're going to give you a better rate, better terms and conditions on your mortgage.
It fits in your budgeting guidelines a lot better than, let's say, lender A, or you can just find it more comfortable dealing with the bank.
You could switch for all those multitude of reasons.
Karl Yeh: Just in terms of a credit question,
Does your pre-approval affect your credit score?
Mujtaba Syed:
Yeah. So, your pre-approval is not going to affect your credit, once again, if you only do, let's say, one or two, right? But if you're going to do 10 different pre-approvals, and you're going to do [00:08:00] 10 different credit checks, and then the credit bureau's thinking, "Why is a client going to a sixth bank if they got approved for the first four?" A credit score is your risk score, right?
That is what the bank looks at. It is a way for us to assess you, individual, on a risk basis, and we take a look at a multitude of things:
- How long you lived in your home,
- how long have you worked at your job?
- Are you single, married, or divorced?
- Are you always constantly applying for stuff?
- Are you taking your credit cards to their limits, sometimes over your limits?
[00:08:30] All of that stuff will come up with a risk score.
640 is an average Canadian. Anything above 640 means you're above the average Canadian, anything less than 640, now you're below average, right?
So the bank will look at that and say, "This client already has below average spending habits, below average credit habits. Do we really want to lend to them?" Right? And it might not even be the case.
So, the fact that you applied to 10 different places, you might not be a credit seeker, but you weren't the right advice in the beginning, the credit bureau's going to think you're a credit seeker, and is going to reduce your [00:09:00] score by that much, and now you're going to come across as the risk to the bank. Have a detailed conversation with six banks before you do an application.
Find out what their rates are, what their terms and conditions are.
Narrow it down to one or two that you're comfortable with and do it with them. And it should not affect your credit score.
Karl Yeh:
Actually, if you want to know more about the credit score, check out our video above and in the description below.
Question of the day
So the question of the day I have for you is:
How is your experience with the entire pre-approval and approval process? And did you actually switch lenders, or did you actually get denied?
Let us know about [00:09:30] your experience in the comments section below.
So if you want to know more about the step by step process of how to get a mortgage approval, check out this video series here, as well as additional videos on home financing, which you can find here. Don't forget to subscribe to keep learning from the experts, and I'll see you in the next video.
Your turn:
Let us know if you have additional mortgage questions or home buying questions that we can answer by submitting them in the comments section below.
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About Mujtaba Syed:
Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.
