Pre-approval, a false sense of security!

Summer is upon us and borrowers are reviewing their options for a first or new home purchase. Whether it's a primary, secondary, or rental residence, real estate brokers and sellers are increasingly requiring mortgage pre-approval to distinguish serious buyers from "weekend shoppers". Pre-approval and pre-qualification, what does it mean, and, more precisely, what does it imply? Let's demystify the subject.

Prequalification

A prequalification might also be colloquially referred to as a "professional opinion on the borrowing capacity of a prospective borrower". It involves an analysis of income, down payment, and credit without considering a specific property. In some cases, a copy of the credit bureau is required, but liabilities may also be considered on a voluntary disclosure basis. Prequalifications are often offered by mortgage brokers without confirming everything with a financial institution. It is, as mentioned at the beginning, a professional opinion on the borrowing capacity of a future borrower.

Pre-approval

On the other hand, a pre-approval is more formal and official. Like prequalification, it involves an analysis of income, down payment, and a credit bureau check, without considering a specific property. Pre-approvals are only provided by mortgagees through a mortgage broker or bank advisor.

A false sense of security

Sometimes borrowers are denied a mortgage application despite having first obtained pre-qualification or pre-approval. This situation can be explained in several ways.

Ownership plays a crucial role in approval, as it provides the ultimate guarantee of repayment to the creditor in the event of default. Properties in a flood zone, in poor condition, or with a history of illicit activity are common examples where financing may be refused despite an impeccable borrower's record.

Income analysis is often also undervalued by professionals or mortgagees. Income verification is often limited to a recent pay stub or income history, but very rarely will there be verbal verification of employment with the employer. However, if you are on probation, have a seasonal job, part-time or if your employer mentions any instability of your income, it is very likely that eligibility will be limited or refused.