Is a mortgage pre-approval a guarantee of you getting a mortgage?
Short Answer: NO
I am going to relate our personal experience for this one as some literature to support my statement.
Our Experience
Back in 2019, your Frugal New Canadians went into the market to buy our first home in Canada. Our Mortgage pre-approval from a Big 5 Canadian Bank was $650K. We saw a few homes, loved one and put down a conditional offer for just short of $600K. An amount well within our pre-approval amount. Long story short, our mortgage was not approved in the week-long period we had for closing. This was prior to the real estate market going berserk. We were very lucky to get our deposit back owing to a financing condition on the offer terms.
So, why were we turned down ?
Based on feedback from our Big 5 mortgage agent, the Canadian Mortgage and Housing Corporation (CMHC) deemed that we had insufficient credit history to be able to qualify for our purchase. CMHC insures lenders in Canada in the event the borrowers (i.e., us) default on our lending obligations.
An approval from CMHC is required if a purchaser is putting down less than 20% down on their purchase. While our lender preliminary approved our purchase, CMHC objected and rightly. See, wifey had moved to Canada just a few months prior to us making the offer and had just started to build her credit history. But Mrs. Frugal New Canadian contributed to 60% of our household income and her credit history mattered more than mine for this application to go through.
Reasons why a mortgage application maybe rejected despite an authorized pre-approval
- Change in Debt Service Ratio – this is a metric used by lenders to assess an applicant’s ability to pay off their mortgage. If an applicant incurs more debt, chances are higher that the mortgage application may be declined. An example you could an individual procuring a new car loan after their pre-approval. Your debt priorities have shifted now and your capacity to pay for the mortgage diminishes.
- Change in Employment situation – You moved to a new job after your pre-approval or have been changing jobs frequently. This would impact the perceived ability of an individual to bring in consistent income period over period. See new jobs also bring them a probation period and uncertainty.
- Property Appraisal – The lender decides to physically appraise the property and decides that the property is worth lesser than the offer. As a result, the delta dollars are to be provided by the buyer as a down payment. One may not have all that extra cash lying around.
So, should you still seek a pre-approval ?
Yes. Here’s why:
- You know how much house you can buy
- You’re able to lock in a mortgage rate for the next few months should the lending rate increase
- You can shop around for better rates after your pre-approval. Communication with your mortgage broker should help here
The pre-approval process is an integral first step in owing a home. But there are factors outside of our control that may make or break a mortgage application. It is important to state to your provider all conditions including credit history, account balances, availability of down-payments etc. It is equally important to understand how changes in any of these or other personal circumstances may affect your actual approval.