I have had cases of angry clients expressing their frustration of being pre-approved by a bank but couldn't get a mortgage when an offer to purchase a property was accepted. Have you ever been pre-approved by a bank only to find out when you have put an offer you don't qualify for a mortgage?Before I explain the difference of mortgage pre-approval and qualification, it is good to understand how lenders determine if someone qualifies for a mortgage. There are 3 legs to the mortgage qualification stool:
- Applicant's income
- Applicant's credit score and history
- Property
Depending on the type of employment (self employed, hourly, salaried, salaried with annual bonus), the underwriting guidelines vary.
Mortgage Pre-Approval
A pre-approval can be turned around in literally a few minutes. Getting a pre-approval is as simple as telling the bank your income and pulling your credit bureau. As you can see from the above points, income and property details require further analysis to approve the applicant.
Furthermore, lenders do not issue a pre-approval for buying an investment property, recreational properties such as cottages, mixed use commercial properties (storefront with apartments on top) or multi-unit rental properties. It is important to state the purpose of the pre-approval when applying with your mortgage broker or bank.
Mortgage Qualification
Being qualified upfront requires thorough analysis of the income, credit score & history and lenders' requirements based on the type of property the applicant is considering to purchase. Here are 2 examples:
1. Buying An Investment Property
As you know by now, lenders don't issue pre-approvals for buying an investment property. In this case the applicant will undergo full analysis taking into consideration:
- Downpayment requirement for an investment property whether the funds are available or borrowed. If borrowed, the additional debt is taken into account for debt servicing calculations
- Rental income calculations: different lenders calculate rental income differently, some are more conservative than others
2. Buying A Home
Cases where the applicant's employment might be best described as one of the following:
- Started their own business within the last 2 years
- Started a new job on contract
- Have been working an hourly job for less than 2 years
- Work in the service industry where tips are not included on their T4s
- Work multiple part time jobs
- Work full time and has a part time/second job
- Business owner who pays him/herself minimal income
As you can see, not all Canadians work 9 to 5 as salaried employees. Our economy is diverse and one size does not fit all.
I hope you can understand why I ask lots of questions when I'm told "I'm pre-approved"; to ensure you qualify for a mortgage and there aren't any last minute surprises.