Fewer First-Timers Get Pre-Approved

First-time-mortgageIf TD Canada Trust is right, first-time home buyers haven’t been preparing for mortgages like in the past.

TD’s annual First Time Homebuyers report found that only 76% of respondents said they got pre-approved for a mortgage before house shopping, down from 91% in 2010.

Depending on your qualifications and purchase timeframe, skipping the pre-approval step when buying  can open you up to rate risk and disappointment.

That disappointment can occur if you’re unexpectedly declined for a mortgage after signing a purchase agreement.

Other findings in the report:

  • 72% of first-timers said they spoke to a mortgage lender before shopping, down from 84% last year.
  • 50% of respondents said they won’t compromise on price when buying a home
  • One third (33%) said they bought or plan to buy a home with a rental unit
    • 71% of those said they will use the income generated from their rental unit to pay off their mortgage faster.

The TD survey was conducted online by Environics Research Group between April 29 and May 16. A total of 1,000 Canadians were polled who had either bought a home in the past 24 months or planned to buy one in the next 24 months.

Steve Huebl, CMT

  1. Working with a mortgage broker can eliminate the need for a preapproval in many cases. As most lenders don’t really underwrite a preapproval, they are only as valuable as the paper they are printed on. A good mortgage broker can advise a client on how much they will be preapproved for based on their knowledge of lender guidelines etc.
    The exception to this is when rates are rising. In this case a preapproval will hold a lower rate. The limit to this is that closing must occur within 90 or 120 days of obtaining the preapproval and this can be difficult with home buyers who are not rushing a decision or shopping in markets where supply is more limited.

  2. I believe one of the reasons people are being pre-approved less is partly because of how easy it appears to get a mortgage. All people have to do is plug a few numbers into an online or mobile app and it’s perceived by the public that that’s all you need to do.
    While there are some great resources of information online (this site included) what we need to educate our clients more on is that the easy access to information cannot replace speaking and working with a professional.

  3. the easy access to information cannot replace speaking and working with a professional.
    Not totally, but a determined individual with some rudimentary research skills can do most of the same things that brokers were doing just a few years ago. Hence the bleeding of broker markershare to the banks. All that matters in the end to me as a consumer is the best rate and terms. If people increasingly are doing the work of the middleman themselves then the market becomes more efficient. Same thing going on with realtors. There will always be a need for the good ones but the days of them holding a monopoly in the information are quickly coming to a close.

  4. Dan, although they underwrite them, they use a 32/40 DSR calculation which may not be accurate for all approvals. Albeit that this would ensure that the buyer wouldn’t over purchase.
    In addition, no documentation is required and if the pre-app isn’t reviewed carefully the buyer may not qualify for the full amount.
    Again, a mortgage broker who knows his lenders and products can give a fairly accurate amount by asking the right questions of the client.

  5. Anyone who researches a topic long enough can learn about it on a rudimentary level. But, as I mentioned, online research cannot replace a professional that works in their respective industry on a daily basis.
    It’s easy to shop “rates” & “terms” online and if that’s all that is important to you great. I assure you there is more to the mortgage industry and home buying process than just that.
    The days of differentiating yourself by providing just best rate & terms are over and I think that’s why brokers are seeing their business go to the banks.

  6. Hi Adam,
    I have a feeling that respondents lumped in rate holds and pre-qualifications with the traditional definition of a “pre-approval.”
    If so, then it’s notable that fewer clients are now securing rate holds and/or getting pre-qualified. Both are obviously sensible strategies.
    Here is the exact question first-time home buyers were asked in this poll:
    “1. Which of the following did you do/will you do:
    a) Been pre-approved for a mortgage
    b) Learned about mortgage options
    c) Spoke to a mortgage lender before shopping for a home
    d) Calculated closing costs, legal costs, land transfer taxes, etc.
    e) Budgeted for property taxes (detached homes)
    f) Estimated heating, electricity, water bills
    g) Estimated annual maintenance costs/fees
    h) Arrange for a home inspection”

  7. LS Wrote: “If people increasingly are doing the work of the middleman themselves then the market becomes more efficient. Same thing going on with realtors.”
    Not always true. Most people don’t have the time or inclination to go it alone.
    For sale by owners are the ones most likely to take advantage of the perceived free-flow of information.
    FSBO’s are traditionally a small segment of the market that realtors weren’t capturing before anyway. Good luck to them.
    As for efficiency, most DIY’ers actually clog up the system, getting in the way of liquidity, due to inexperience and incompetence.

  8. IMO, any person who contemplates buying something as expensive as a home is doing themselves a dis-service to blindly hand over the home buying reins to so called professionals without first educating themselves.
    Caveat emptor “Let the BUYER beware”

  9. Since you can find free “how much can you afford?” calculators on almost every financial institution website, newspaper website, and mortgage broker website, and elsewhere (e.g. CMHC site), many people feel that they can run the numbers on their own.

  10. The average Joe has no idea how to qualify themselves. How many people can calculate their own TDS ratio for example? How many know how lenders treat bonuses, part-time income, or rental income? How many know how to structure a deal when exceptions are needed? There are so many guidelines to know for each lender. It is like a layperson trying to build a car engine.

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