Pre-Approvals: A Dying Breed?

Mortgage-Preapprovals Pre-approvals are something many lenders could do without.  The problem (from a lender’s perspective) is that people get pre-approved and then frequently don’t close.

One bank that recently did away with pre-approvals in the broker channel was rumoured to be losing $20 million a year on them.

Pre-approvals are pretty expensive, and the return for lenders is debateable.  In most cases, less than one-third of pre-approvals actually close.  Meanwhile, the lender is tying up human resources to process the applications, as well as capital to hedge the rates (if rates move adversely, the lender is on the hook, so lenders pay to lock-in the interest rates using derivatives).

In recent weeks, some very big-name lenders have halted pre-approvals–either altogether, or in the broker channel.  Two of the most prominent have been FirstLine (a division of CIBC) and TD.

There are still some good lenders doing pre-approvals but their numbers are dwindling. Among the best is ING.  ING has solid rates, great perks, and they do a full rate look-back (meaning:  if rates fall and then rise again, you automatically get the lowest rate during the pre-approval period).

It’ll be interesting to see what the future holds for pre-approvals.  If we had to guess, more lenders may eventually either:

A)  Eliminate them; or,

B)  Start charging rate premiums (some lenders, for example, already charge 0.10% more for pre-approvals).

We’d love to hear your thoughts and predictions!

  1. could lenders automate pre-approvals? a quick adjudication against the most import details; income, beacon, LTV, etc.. through their underwriting systems.
    it may be costly to implement, but would save money over the long term.
    it would need to be tweaked to a point where almost nothing changes from pre-app to real deal though (in the terms).
    potential money saver.

  2. I got a pre approv for 18 month forward starting mortgage for 4 year fixed from RBC @ 3.59%
    That is posted -1.25% so i guess I am paying a 25bps premium but its an 18 momth preapproval.

  3. AJ better read the fine print on that one that is a builder rate commitment, have your purchased from builder that will be closing within 18 months? Not exactly the same thing as a preapproval for a resale home.

  4. Automated or automatic preapprovals are used by some lenders and they are great. The response is often within minutes, you get the rate hold and it does not occupy much time for the lender.

  5. The problem is that automated preapprovals dont solve the rate hedge cost issue. So many people abuse the system. There a lot of habitual pre-appoval junkies out there. Lenders should charge fees for pre-approvals and rebate them at closing. That would discourage most of the free-riders.

  6. I’m confused as the interested rate is going lower and lower, while I’m locked at 5.4% for another two years.
    Ok here is the story, I have a house which is about 300K worth and I have just under 125K mortgage remains on it. My mortgage policy matures in Apr 2011, interest rate is 5.40%. I actually bought house three years ago and I put over 25% down and I paid off about under 80K in principle in three years (my bank allows me to pay max 15% principle each year, so I try to make extra payment each year).
    I was wondering if it is good idea to refinance it? Even though I don’t need any extra money right or anything. Only thing that is making me think about is interest rate which is almost at 4%. My refinance plenty will be around 3,400 (meaing I have to pre-pay interest difference for the rest of the term).
    I hope/think I will be able to pay 15% each year for the remaining term.
    So do you think if it’s good idea to refinance or I should stick with what I have at the moment?

  7. Hi ManPower,
    Thanks for the post, however, this is probably the wrong thread for that sort of question. The forums are really designed to be topic-specific.
    Have you tried emailing a mortgage planner? Here is a list of local planners or please feel free to email us directly if you prefer.
    Kind regards,
    Elizabeth, CMT

  8. It drives me crazy when people blame the consumers for this — calling them freeloaders, etc.
    What else is the consumer supposed to do?
    Most lenders refuse to post their actual rates, making it impossible to know what sort of discounted rate/term, etc. you can *actually* get unless you apply.
    So, you apply, get a rate from a bank, and then apply elsewhere to see if you can get a better rate (because those lenders don’t tell you what rate they can give you unless you apply too).
    If the lenders can’t be upfront about rates/terms *before* the application/approval process, then they have no right to complain when consumers go elsewhere afterwards when they find a better rate.

  9. Melanie & Robert
    You say, “Meanwhile, the lender is tying up human resources to process the applications, as well as capital to hedge the rates (if rates move adversely, the lender is on the hook, so lenders pay to lock-in the interest rates using derivatives).”
    Will you undertake to provide your readers with more information regarding the process of hedging?

  10. I agree with Bob… although why doesn’t the bank split out the rate hedge from the revealing of the ultra secret discount from the posted rate they will give you. Tell me for free the best rate you’ll offer me today, and if you’ve got the lowest, let me come back and say “fine, hedge it for me, here’s a fee that you rebate when the mortgage starts”.

  11. To Bob –
    Most reputable lenders DO post their actual real rates. Most often it is the big banks who play games and make you negotiate.
    Regardless, too many people get preapproved with no real intention of closing. These consumers are killing it for everyone else.
    I also disagree that you have to apply somewhere to get their best rate quote. If that is happening to you then go elsewhere.
    Tan

  12. I know what you all mean, I am having the same problem every day with every thing I want to buy. I mean the house I really want to buy, I don’t understand why the sellers don’t just list for the absolute lowest price they are willing to accept and forget this negotiation thing.
    The new car on the lot, the same thing, Everybody should just lower prices to what everyone just barely needs to accept. Lets get rid of the whole idea of capitalism and risk altogether. Be careful what you wish for.
    (This would be sarcasm for all of you that don’t have the capacity to understand).

  13. Mike,
    I have no problem with sellers not listing their lowest price. I’m all for negotiation. It seems to be the lenders that want to do their best to restrict consumers from doing so by, in essence, charging consumers for telling them what rate they can give them.
    Talk about being careful what you wish for — do folks like Paul and Tan, who seem to blame the consumer, really want lenders to start charging more for this? Doesn’t this just act to restrict consumer choice?
    To use your analogy, Paul and Tan want car lots to start charging people to tell them how much the car is going to cost them, and not refund the money unless they actually buy the car. Is that really your model of capitalism?
    Again, if lenders want to negotiate their best rate, they shouldn’t be surprised when consumers don’t just sign on the dotted line the minute they walk through the door.

  14. @ Mike Oxlong – Seems to work in the marketplace for most commodities. It would take a long time at the checkout counter if I had to barter with the cashier on the price of bananas, Frosted Flakes and ground beef. Also, the waiters at your favourite restaurant might get annoyed if you make a counter offer on the price of their special of the day.
    Isn’t setting the lowest price you are willing to accept EXACTLY how a competitive market works?
    But, as Bob implies, if you’re going to adopt bartering as your business model, it’s a little disingenuous to complain about costs related to areas such as pre-approvals or poor renewal rates.
    Al R

  15. Bob you say “Doesn’t this just act to restrict consumer choice?”
    Bob, having fewer choices restricts choice.
    That is exactly what will happen unless consumers are held accountable for pre-approvals.
    Tan

  16. Al R, you state:
    “Isn’t setting the lowest price you are willing to accept EXACTLY how a competitive market works?”
    That is not in fact how a competitive market works, the seller wants to maximize the price and the buyer wants to minimize it and they meet somewhere in the middle at a point they both can agree on. The price on bananas corn flakes and ground beef has already been settled on through competitive pressures.
    To reflect back to the posters on site, Everybody wants the absolute lowest rate on a mortgage. If you have other products (accounts, investments etc.) Then you may be able to negotiate a lower rate on your mortgage. And by the way, Check out the other posts on this site, There is a lot more you need to consider about mortgages than just the rate. Don’t walk into a BMW dealership and ask the salesperson to sell you a 3 series for the price of a Lada.

  17. Mike,
    First, posters on this site are very aware of the different mortgage options, and many are not only looking for the lowest rate. Having said that, for many people, the lowest rate *is* the most important consideration, since they will not be taking advantage of pre-payment options, portability, etc., anyway. Why pay a premium for something you aren’t going to use?
    Second, you say that the price on corn flakes has already been settled through competitive pressures. I see the mortgage industry as no different — competitive pressures continually adjust the price, and I see consumers playing a big role in this by *not* simply accepting the first approval offered.
    Nobody is asking lenders to offer mortgages at a loss.
    This thread is about pre-approval costs.
    *As currently structured*, many (most?) lenders will not tell you the discounted rate you qualify for until you apply. Even those lenders that post their “actual” rates WILL NOT CONFIRM that you qualify for that rate UNTIL YOU ACTUALLY APPLY. This leaves consumers with a great deal of uncertainty. Consequently, it seems a bit unreasonable to expect consumers to simply apply at one place and not shop around for different rates (and yes, for different mortgage options too).
    You seem to want a consumer to simply send off one application to a single lender and then only accept that offer in order to keep pre-approval costs down for the system as a whole.
    If the lenders wanted to, they could easily split out the “approval” stage from the “rate hedging” stage. But they don’t.
    And they choose not to do so largely because they *don’t want* to encourage consumers to shop around. They *love* people who only apply at one place and take the offer. The more they can do to force consumers to not shop around the better; and what better way to prevent people from shopping around then to charge them an “application fee” or a “rate hold fee”.
    Sorry, but this consumer is going to continue to put “competitive pressures” on the lenders, rather that colluding with them.
    If they split off the approval from the hedge processes, then I’d be very pleased to pay a fee to have them hold my rate. But, so long as the approval and rate hedge are bundled, I’m going to keep on shopping around until I can find the best mortgage for my needs. I’ll let you help keep my rate down by just accepting whatever is first offered.

  18. Hi,
    To come back to your original question which was should the banks do away with pre-approvals or charge? Well let me tell you my story. I have been trying to sell my house for the past 8 months and just recently finally sold it. It was a nightmare for me because most buyers do not get pre approved for a loan. In total, we negociated 7 accepted offers before the last one and they all fell through because in the end the buyers did not get pre approved and could not get the mortgage. It was months of getting your hopes up and then down again as we had a conditional offer on another house so if I can save any other buyer the same faith I vote for the banks to keep it just the way it is, in fact real estate companies should make it mandatory for a potential buyer to be pre approved financially before putting in an offer on a property.
    Annie

  19. Pre-approval shows that the buyer is a serious buyer and acutally wants to buy.
    Some buyer use dirty trick to back off from their contract by saying they didn’t get approved.
    I would sell my property to a person with a pre-approval with confidence.

  20. Bob.
    You are clearly ignorant of how the mortgage industry works. This quote of yours makes that obvious:
    “many (most?) lenders will not tell you the discounted rate you qualify for until you apply.”
    That only applies to subprime mortgages and people with questionable qualifications (credit, income or down payment problems for example).
    Every reputable lender I’ve ever dealt with quotes rates in the pre-qualification stage. You don’t have to apply. You simply answer some basic questions about your qualifications.
    LJ

  21. I used to be one of those who firmly believed in pre-approvals until just recently when we found the house of our dreams. The lender had approved the mortgage and all our numbers (GDS, TDSR, beacon scores) were within guidelines. However, CMHC declined the mortage insurance. Subjects are due to be removed at week end and closing is set for end of the month. We are trying to dispute CMHC’s decision but still don’t have an understanding of their reasons behind it. We are also trying to explore the option of going with another insurer (Genworth or AIG). Frankly, until CMHC or another mortgage insurer actually puts its seal of approval on a deal, it could still go bust even with a pre-approval in place and who suffers . . . the consumers (buyer and seller).

  22. As a broker, I all too often see the same thing as Marie experienced.
    CMHC should really allow lenders to run preapprovals though their Emili system. At a minimum, pre-approvals should be automatically analyzed by the lender and insurer for obvious decline factors.
    Otherwise preapprovals are nothing more than rate guarantees.

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