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The Intricacies of Mortgage Pre-Approvals

Special to CMT, By Rick Robertson
Mortgage Mentor Inc.


Pre-approvalWhile doing some research recently, I called a number of Realtors and mortgage borrowers to get their definitions of a “pre-approval.”

After compiling their answers, here were two common responses:

  • A confirmation or certificate that gives a borrower the assurance to write a purchase offer without a “Subject to Finance” clause.
  • The process of calculating debt service ratios (DSRs) and reviewing support documents to determine if the borrower meets a particular lender’s guidelines for funding.

In studying Canada’s broker-friendly lenders, we’ve found many variations in pre-approvals, but just one common reality:  Virtually no lender actually offers a pre-approval that matches the marketplace’s definition.

That actually wasn’t a surprise. What did surprise us, however, were the comments of two lender executives we interviewed. When asked to define the difference between a pre-approval and a rate hold, they confidently stated that both “are the same thing.”

In most mortgage professionals’ opinions, pre-approvals and rate holds have different meanings. Pre-approvals are generally seen as being more thorough and underwritten while rate holds are simply a rate guarantee.

Confusing the issue further is that some lenders offer what they call a “pre-approval,” but it’s actually just a “rate hold.”

Our research of broker channel lenders revealed several policies that must be considered when choosing the optimal pre-approval or rate hold. Here’s what we found:

  • Detailed borrower information and/or documents are typically required to get a full underwritten pre-approval.
  • For simple rate holds, few lenders actually review any documents.
  • Some lenders (at least four by our count) will not grant a rate hold if there is no subject property information.
  • Numerous lenders add rate surcharges for rate holds (but some don’t).
  • Most lenders do not offer rate holds on refinances.
  • Only three lenders allow borrowers to change to a different term at the rate available on the day of the “hold”.
  • If rates fall, the majority of lenders will drop a client’s rate at the broker’s request.  Four lenders will automatically give the client a rate drop.
  • Seven of the lenders we spoke with assess brokers’ funding ratios based on follow-through of rate holds/pre-approvals. (Funding ratios are, of course, used to determine broker compensation, status and/or eligibility at various lenders.)

With all the variations and permutations, it’s a wonder that mortgage brokers can keep up with pre-approval guidelines. For the typical consumer, this is one area where discussion with an experienced broker is time well spent.

‡ One of a handful of exceptions that offer close to a full-fledged pre-approval (with document checking) is First National. But it does so on an exception basis and cancellations (of converted pre-approvals) affect the broker’s funding ratios. Although this lender calls it a “pre-approval”, the process is that of a full-on approval except for property information. To be safe, however, a purchase offer should still be conditional on the lender’s acceptance of the property. (The property must also meet appraisal value, default insurer guidelines, be marketable, be eligible for fire insurance and title insurance and be free of hazards, etc. Pre-approvals almost always leave some questions unanswered.)
Rick Robertson is President of Mortgage Mentor Inc., a firm specializing in the development of lender selection and finance option calculation software.