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MORTGAGE PRE-APPROVAL vs. MORTGAGE APPROVAL: What's the difference? (and why both are important!) - YouTube
Channel: Homebuyer's School
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- In this video, you'll
learn the differences between
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a pre-approval and an approval,
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when they're used, and actually,
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if you can switch a lender
after you get pre-approved.
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That's starting right now.
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- [Narrator] Welcome to Homebuyer's School
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brought to you by Brookfield Residential.
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- Hi everyone, I'm Karl.
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Welcome to another
Homebuyer's School video,
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a channel where you get
the latest strategies,
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tactics and tips from home buying experts.
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And remember, if this is your
first time on this channel,
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and you want to get the latest
strategies from the experts,
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hit the subscription button below.
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Hit the little notification bell,
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so you don't miss anything.
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So, today I'm joined by Mujtabe Syed,
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Mortgage Specialist with
the Bank of Montreal,
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and the question we're
gonna answer today is
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So, what is the difference between
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a pre-approval and an approval?
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I know there's some confusion about,
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hey, if I got pre-approved,
I should easily get approval,
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which is not always the case.
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- It could be the case sometimes,
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and it could be not
the case at all, right?
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So, what a pre-approval
does is that we approve you
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as an individual, as a couple,
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whoever looking at buying
a home as themselves.
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Now, final approval will come
when you find the property
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which is one of the five C's
of credit that we talked about,
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which is collateral.
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Which is a very, very
important part of it because
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that is what the bank
is using as security.
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So, final approval will consist
of actually approving you
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and the property now as well.
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Now, if the bank doesn't
like the property,
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don't take that as any slight against you,
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it could just be the fact that
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hey, the bank didn't like the property.
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Some other situations has happened,
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where circumstances where
you get pre-approved,
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you find the property,
the property's approved,
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but you also don't get a final approval
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because it's subject
to insurance approval,
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which is what we talked
about CMHC approval,
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genworth approval,
counter guarantee approval
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when you're putting less than 20% down.
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It has to go with your approval twice.
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One will be with the bank
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and then the next will be
the insurance provider.
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And the reason why their
approval is so important
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is because they're actually
providing insurance
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on the amount that's borrowed.
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So, without the insurance
approval we can't do anything.
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So, you might have been pre-approved
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but we also cannot sent
a deal to the insurer
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without having a property in place
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'cause they don't look
at just pre-approvals
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the bank will look at the pre-approval
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you find the property,
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and then we send it to the
insurer for an approval
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and they might come back and
they might not like the deal.
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But they might come
back to you and then say
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"listen we need to restructure this deal".
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Restructure just means,
let's change the dynamics
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of this deal.
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Let's add a little bit more down payment.
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Let's pay off some more debt.
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Let's add a cosigner.
Let's add something else.
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So, they might come back to us
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with a lot of options and usually they do.
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In a good scenario we'll
still get an approval
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done that way.
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But they could come back
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and just not like to file at all.
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But we do have options, right?
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We do have access to three
other insurance companies
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clients will ask me, "we
got declined for one,
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is it a good chance we get
declined from the other one?"
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and I would say not necessarily.
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Every insurance provider,
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even though they have certain guidelines
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they'll look at their
underriding practices
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a little bit different.
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So, it's always worth trying
it with all three insurers
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to see where it fits.
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Now if all three of 'em don't get approved
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then unfortunately you're
out of options at that time,
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and then maybe we just
have to wait a little bit
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so we can do some little
credit coaching at that time,
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maybe get a little bit
more saving down payment,
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and then get you back into the
whole buying process again.
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It might be very disheartening
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to didn't get the approval
you were looking for,
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but the second time around
the chances are a lot higher
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of getting you approved
because now we've mitigated
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any of the risks that your file has.
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The approval process it's different
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and it varies per
circumstances and per clients
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and insurance companies.
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- And if you wanna know more
about mortgage insurance
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I'm gonna leave the video up here
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and in the description below as well.
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When you mentioned a
bank doesn't like a home,
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you might have to get another lender,
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what does that mean?
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- So technically like one
the most important things
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all of the five C's of
credit is collateral.
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This is technically what
the bank has for security
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for the money they've lent to you.
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Now if that is a home that
is not gonna last 25 years
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right?
- Mhm
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- Let's say the life of
the loan is 25 years,
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but the bank has an idea
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that this house is
gonna fall apart in 20 -
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- Oh, okay.
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- there's five years of
risk there that they're-
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well what happens if the house falls apart
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and you decide not to pay your mortgage,
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- There's no collateral.
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- what is the bank gonna
do for those five years?
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(Karl laughs)
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right? There is not a lot they can do.
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- Yeah
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- Or the fact that they
might come out like-
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I've had this situation
before where a client
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was getting an amazing
deal on a house right,
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and we found out it was a grow operation,
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(Karl laughs)
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So, what a grow operation unfortunately is
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somebody who is into illegal
activities in the house
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they were growing something
that shouldn't have.
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Usually when its a grow
operation or grow-op
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there is usually a lot
of mold issues, right?
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So it becomes a hazardous place to live.
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So when a bank finds out about that,
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they're not gonna wanna lend to that
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no matter how structurally
sound the house is,
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because there could be a
lot of underlying issues
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that you're not gonna find
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that could be unhealthy even for you,
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for your family, for your
children what ever it is,
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it becomes a health hazard.
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They might not like it for that reason.
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There might be another situation
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where let's say they find a house
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and they feel like it's overvalued.
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So, that means that their
collateral is not ideal.
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So lets say someone selling
a house for $400,000
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but the appraisal only
comes out to $350,000.
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Why would the bank lend something
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that the value is just not there.
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And on top of that to bring
that to your attention
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and say "why would you wanna buy something
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that you're over paying by $50,000.
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We just don't see the value there".
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There's multitude of reasons
why they don't like property
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but the biggest reason is it
doesn't fit their criterias
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for a collateral.
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It's not good enough for
them to put their security on
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so they can actually recoop their cost
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in that worst case scenario.
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- So, if the bank doesn't
like the collateral,
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the home that you have selected,
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and if you go to another lender,
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Do you have to go through
the entire process again?
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Get a pre-approval, get approval,
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or are you just, you know,
at their approval stage?
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- In most cases lender
doesn't like the collateral,
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clients stay with that lender
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and then they might agree with the lender
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and say I don't like
this collateral either.
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- Oh, okay.
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- Right?
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And they might just go and find a new home
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that actually fits their
needs and fits the banks needs
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and you go ahead.
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Very seldom chances will clients
absolutely love that house
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and they don't agree with
the banks reasoning for not,
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then yes they can go to a different bank
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and they will have to go through
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the whole process all over again
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and then start doing that,
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but it's very seldom that happens.
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For a bank not to like a
collateral it has to be significant
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and if they actually
provide that information
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or prove to you if it makes sense to you
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then you would also not want to, right?
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Because it is also your
investment as well,
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not just the banks.
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- Can you switch a lender
after pre-approval?
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- Yeah, absolutely, yeah.
- Yeah
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- So a pre-approval, once again, right?
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It's just tied to you, it's
not tied to a property.
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You can even switch
lenders for final approval.
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Let's say you're building
a brand new home,
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and your build process
is taking 10 months.
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You start with your bank and
then you realize later on
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the rates are not the
best with this lender,
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you don't like the terms and conditions,
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but you haven't signed
anything yet, right?
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You haven't signed on
dotted line 'til ten months.
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You can switch your approval
within that ten month period.
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You have time to do that.
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- So, you are not locked in
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'til literally your
first payment is reduced.
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Or 'til the bank actually lends out money
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for the transaction to be closed.
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I've seen some extreme cases
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where clients have switched
at the very very end,
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at the lawyers.
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So lawyers have
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- two sets of documents from
to different lenders, right?
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And then they will ask the client and say
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"which lender do you want to go with"
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and they will tell them
and the other lender
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just kind of steps away.
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So, it really just depend
on a case by case scenario
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but you can switch 'til
the mortgage is advanced.
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If the mortgage is not advanced
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you can switch to a
different lender at any time.
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- What are some reasons
you would actually do that.
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- It could be the fact that you
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weren't comfortable with the rate.
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The lender is not looking
at budgeting at the rate
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you find that the other lender
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is wanting to be more
flexible with the rate.
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You feel like they're gonna
give you a better rate,
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better terms and conditions
on your mortgage.
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It fits your budgeting
guidelines a lot better
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than let's say lender A.
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Or you could just find more comfortable
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dealing with the bank.
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You could switch for all
those multitude of reasons.
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- Just in terms of a credit question,
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does your pre-approval
affect your credit score?
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- Yeah, so like your pre-approval
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is not gonna affect
your credit, once again,
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if you only do let's
say one or two, right?
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But if you're gonna do 10
different pre-approvals
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- Yes
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- And you're gonna do ten
different credit checks
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and then the credit bureau is thinking
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"why is a client going to a sixth bank
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if they got approved for the first four?"
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- Mm
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- A credit score is
your risk score, right?
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That is what the bank looks at.
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It is a way for us to assess
you individual on a risk basis.
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And we take a look at
a multitude of things.
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How long you lived in your home.
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How long have you worked at your job.
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Are you single, married, or divorced.
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Are you always constantly
applying for stuff.
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Are you taking your credit
cards to their limits,
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sometimes over your limits.
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All of that stuff will
come out with a risk score.
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640 is an average Canadian.
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Anything above 640 means you're
above the average Canadian.
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Anything less than 640 now
you're below average, right?
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So, the bank will look at that and say,
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"This client already has
below average spending habits,
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below average credit habits.
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Do we really want to lend to them", right?
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And it might not even be the case,
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so the fact that you've
applied to 10 different places
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you might not be a credit seeker
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but you weren't given the right advice.
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In the beginning, the credit bureau
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is gonna think you're a credit seeker.
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And it's gonna reduce your
credit score by that much,
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and now you're gonna come
across as a risk to the bank.
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Have a detailed
conversation with six banks
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before you do an application.
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Find out what their rates are,
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what their terms and conditions are,
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narrow it down to one or two
that you're comfortable with,
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and do it with them,
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and it should not affect
your credit score.
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- Actually if you wanna know
more about the credit score
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check out our video above
and the description below.
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So, the question of the
day I have for you is,
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how was your experience
with the entire pre-approval
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and approval process and did
you actually switch lenders
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or did you actually get denied?
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Let us know about your experience
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in the comment section below.
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So, if you wanna know more about
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the step by step process of
how to get a mortgage approval
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check out this video series here.
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As well as additional
videos on home financing
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which you can find here.
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Don't forget to subscribe to
keep learning from the experts
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and I'll see you in the next video.
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