19 Mar

Preapproval vs Prequalification. Is there a Difference?

General

Posted by: Lyle Green

When you feel you’re ready to start looking for a home but don’t have all your ducks in a row, you go for the first step; which is to get financing for your home.  You want to avoid any problems when you do find your dream home.  You speak with a qualified person to get your “Preapproval” for your purchase.  That way, when you do find your dream home your financing is guaranteed.  Then nothing can come between you and your new abode, right?

Well, in the words of a famous sportscaster, “Not so fast my friend!”  You see, that “preapproval” isn’t what you think it is.  You are not guaranteed financing because you have it.  It is misleading in the fact that there are things involved in the purchase that may still lead the lender to not provide you with financing.  That is the reason I don’t like the term “preapproval” and choose not to use it with my clients.  It is misleading and conveys a false sense of completion to the client in regards to financing.  I prefer to use the term “prequalification,” since you’re qualified but not guaranteed approval.

In fact, a real qualification isn’t even given by most lenders now a days.  What some people think is a preapproval is really only a rate hold.  For instance, someone may go to their bank seeking a mortgage and leave thinking they are preapproved.  “That’s what they told me,” you may say and leave with a false sense of security.  However if the person you were dealing with did not ask for or look at any paperwork from you, all you have is a rate hold.  Meaning, whatever the rate is at that time, you are eligible to get it even if rates were to increase later on.  Good to have, but not a prequalification.

In order to be prequalified, the lender must see documents to support the income claims you declare to them.  Just telling them that you make $100,000 household income isn’t enough.  They need to review your Notice of Assessment(NOA), T1 General and T4.  They need to see a job letter and pay stub.  Only then can they confirm your numbers and grant you a prequalification.  Bare in mind, each lender is different so not all will require the same documents.  Some may want more, while others will want less.  The bottom line remains the same; documents need to be reviewed.

Credit needs to be checked as well.  You may make $500,000 a year and only want to buy a small condo.  But if you have a lot of debt and a low credit score, you will not qualify for financing.  Credit card debt, student loans, car payments and possibly other mortgages, are factored into your qualification.  With credit cards, obviously having a high amount is not good.  However being close to or over your limit is also looked at negatively.  Also, for certain debts like car payments, most lender will not go by your actual payment amount but by a percentage of the remaining debt.  So the payment that they ascribe to you in qualifying you may be more than your actual payment.

If you own other properties those mortgage payments are factored in as well.  A new home purchase is not isolated from them; they must be included.  If you are earning rental income, some of that can offset the mortgage debt.  Each lender has their own way of calculating how they do that, with some being much more favorable than others.  However it is factored in to some capacity.

Now that you’re taken care of on your end, the other possible issue is with the property that you select.  Lenders not only look at your income, debt and credit score, they also look at the property.  The fact that they are lending you a huge amount of money, makes them very interested in the quality of the property you want to purchase.  Because in the event that you default on your mortgage, they are going to have to sell it to someone.  And if it’s not a very nice place that is hard to sell, it may be a while before they get their money back.  Needless to say, that scares them!

Now in reality they will get their money back because (a): the mortgage is insured, or (b): all insured mortgages are backed by the government anyways or (c): they sell the property.  However, the process and time that it would take is not something that they would want to go through.  So they are careful about the properties they lend on.  Is it in a popular area, or is it in an isolated area?  Is it a tare down? What’s in the strata minutes?  Is there an expensive assessment coming?  These are things that factor into their decision.  If they find something that substantially affects the homes marketability, or costs that will substantially affect the borrower, no mortgage will be given.

So the next time you hear the phrase “preapproved” know that it’s probably being misused.  Now you know the proper terminology.  Seek out a prequalification from your mortgage broker and choose your home wisely.

12 Mar

I Have No Debt But I Can’t Get a Mortgage? Why?

General

Posted by: Lyle Green

You are a responsible person.  You know money can be hard to come by and should not be used frivolously.  You know of the dangers of too much debt and what damage can be done with a credit card.  Your parents preached to you to “not over spend” and to “spend what you have” so you listened.  With that knowledge, you decide to have no credit cards at all.  Out of sight, out of mind.  The temptation is erased completely.  You use cash or a debit card only to mitigate any problems with your credit.

Now it time to find a home of your own.  You saved up a big down payment and are ready to buy your first home.  You go to get financing for your purchase, excited about becoming a home owner.  It should be quick and painless, no problem at all.  You’ve been at your job for a number of years, make very good money and most importantly, you’ve been good with your money.  NO DEBT!  What lender wouldn’t welcome you with open arms?  Well……pretty much ALL of them wouldn’t!

You see, as good as it is that you have no debt and paid for everything with money that you had, lenders look at things differently.  All of the “A” lenders (lenders with the best rates) want to see a history of credit repayment.  They also want to see current history of credit repayment.  So that student loan you paid off years ago, is not at all helpful in qualifying for a loan today.  The best way to satisfy this requirement is with….a credit card.

What about the interest you might say?  Why do I have to waist money on interest when I have the money?  Well, the good news is you don’t.  You see all credit cards have a grace period where if you pay the full amount owing, there is no interest charge.  The trick is to think of your “credit card” as a debit card.  Only spend what you have and pay the full balance all the time.  In doing so, you eliminate any chance interest charges and you build your credit at the same time.  Also, realize that lenders look at the number of times you use your card.  So if you use it only twice a year, that may not have much benefit to you.  A good idea would be to get one that has some sort of points or rewards.  Cashback, or travel rewards are a couple of good options.

Credit cards are not the only source of credit building.  An unsecured line-of-credit is also looked at.  They have much better interest rates than a credit card, but the interest is not avoidable which make them a less desirable option to the credit card.  They’re also not as easy to use with no card to use at stores so money must be withdrawn or transferred online or in a branch.  If you are having trouble paying your credit card balance in full, then you might think about using a line-of-credit since the interest rate is so much better.

Auto loans or payments also qualify for credit building.  You can even get 0% financing in some cases.  The down side of them is the fact that it limits the amount of mortgage you can qualify for.  Financing for a new vehicle usually means a substantial monthly commitment.  Having a payment of $500 per month could mean the difference in qualifying for a condo in Vancouver, to having to find a place in Surrey, or Abbotsford instead.  If you’re in the market for a home and a vehicle, it may be a good idea to get the home first before you go car shopping.

There are a few more options for credit building, but the bottom line is this: for credit building, the credit card is king.  The ease of use and the ability to quickly build your credit and score make it the best choice.  Adding the fact that two “credit lines” are required by lenders secures its best option status.  It’s much better, and easier, to build your credit with two credit cards than it would be with two lines-of-credits.  So if you are in the market for a home, make sure you have the necessary credit.  Build it wisely, and responsibly.