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Aug. 17, 2022

Why Pre-Approvals Are Falling Apart

Why Pre-Approvals Are Falling Apart

Although much of what we chat about in this episode isn't necessarily new information, it certainly is very relevant at the moment. Take a listen to find out 5 reason's why mortgage pre-approvals are falling apart.


Although much of what we chat about in this episode isn't necessarily new information, it certainly is very relevant at the moment. Take a listen to find out 5 reason's why mortgage pre-approvals are falling apart.

Transcript

Speaker 1:

Welcome to the I Love Winnipeg Real Estate podcast. Your premier resource for buying, owning and investing in Winnipeg's real estate market. And now, here's your host, Adrian Schulz, who loves all things real estate, property management, and mortgage financing.

Adrian Schulz:

In today's episode, I want to speak with you about why mortgage pre-approvals are falling apart on deal day. What does that mean? Well, most home buyers obtain a pre-qualification or a pre-approval letter from their mortgage broker or bank, or credit union during the home buying process. And they do so with the expectation and understanding or assumption that they are fully approved for a mortgage. Due to recent changes in the economic and real estate landscape, some pre-approvals have actually been falling apart. It's important to note that there is no new policy nor specific trend that is affecting this. However, there are several factors playing into what's currently going on with pre-approvals. I'm going to give you five different explanations of why a pre-approval may fall apart.

Adrian Schulz:

Number one. Since the qualifying interest rate for a mortgage is 5.25% or the mortgage rate plus 2%, whichever is greater, many, if not most, pre-approvals done prior to the recent mortgage interest rate roller coaster are no longer valid. For example, if someone had received a pre-approval based on a 3% interest rate and having to add the two equals five, but today's interest rate is 4.5, then they now have to qualify at 4.5 plus two, which is 6.5. The way around this for many continues to be going with a variable or an adjustable-rate mortgage, such as prime minus 0.9, which would be 3.8% plus the two, which would be 5.8, slightly lower than the fixed qualification formula previously mentioned. But even that gap seems to be losing its edge.

Adrian Schulz:

Secondly, many online brokers versus a local mortgage broker or rate sites and bank and credit union sites offer various versions of a pre-qualification versus pre-approval versus fully underwritten pre-approval letter or a certificate. To put that into context, everyone wants their mortgage sales pipeline full so that the more pre-approval letters are out there, the more chances the broker or lender has of getting business whilst risking the deal can't close if it wasn't fully underwritten. If they did do a light or a bare underwriting of a file, then perhaps they end up asking for co-borrowers or 20% down payment to try to make the deal work.

Adrian Schulz:

Third, if a client didn't provide a recent pay stub, current dated job letter, two years of notice of assessments, last year's T4, and 90 days down payment accumulation bank statement proof, or a gift letter from a direct relative, then they were not fully underwritten pre-approved, to begin with.

Adrian Schulz:

Fourth. Sadly, not even bank or credit union pre-approvals are necessarily worth the paper they're written on. As it's dependent on the person who did it and to what degree they reviewed the documents and to the credit report. Keep in mind that bank and credit union staff are not necessarily licensed mortgage agents. They are unregulated mortgage salespeople. Whereas licensed mortgage agents or licensed mortgage brokers, in most cases, are fully dependent on seeing the file get funded in order to be paid because they're paid by the lenders. So one would assume that they're going to be more reliable and more cautious than someone that is on a salary or hourly wage at a retail financial institution.

Adrian Schulz:

Finally, and it's a factor not commonly talked about is that a quarter of mortgage approval is actually dependent on the lender and mortgage insurer, such as CMHC, Sagen, and Canada Guaranty approving the property and the value of the property itself. In the past weeks, mortgage insurers have more commonly been ordering desktop, drive-by, or even full appraisals, even on high-ratio-insured mortgages, due to their doubting the sale prices because of the regionally dependent cooling real estate markets. Because some values aren't being supported by mortgage insurers, and if a buyer only had 5% down payment, then the deal may fall apart because they can't afford to fund the difference between the purchase price and the appraisal completed on behalf of the mortgage insurer, not necessarily lender. The irony is that appraisals don't seem to be keeping up with market values at the moment, but I'll leave that to a qualified appraiser to respond to. Thanks for listening.

Speaker 1:

Thanks for listening to the I Love Winnipeg Real Estate podcast. If you like this episode, please subscribe and give us a rating which will help us reach more listeners. Until next time, connect with us on social media and online at ilovewinnipegrealestate.ca.