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Archive for the ‘Pre Approvals’ Category

Why Pre Approval Rates are Different than “Live Deal” Rates

Friday, March 18th, 2011

Transcript of Video Blog:
Hi everyone, Rowan Smith with the Mortgage Centre. I want to talk a little bit just about our current interest rates and why people will get a different rate on pre-approval than what they get it they have a live deal.

A lot of lenders have started doing things which are called quick closes within 30 days or a deal is only available for a live deal and you actually have to have a contract in place. So for example, some of my lenders are offering 4.14 as a current rate on a 5-year for a pre-approval. So that rate is guaranteed. Read the rest of this entry »

What Is a Pre Approval Really? Pre-Approvals Aren’t All You Think…

Saturday, January 16th, 2010

We take many calls and hear anecdotal stories from clients about how they were “pre-approved” by their bank (or another broker) for $265,000 but when the deal came together it all fell apart because the bank would only give them $150,000 (or some such story). My career is filled with client stories from their banks.

This doesn’t happen when a client uses me on their purchase or pre-approval.

This video blog outlines what a PRE-Approval really is, what you can rely on, and why my service level is very different (and superior) to most brokers, banks, and the competition at large.

Transcription of the Video Blog:

Hey everybody, Rowan Smith from the Mortgage Centre.

It’s January 2nd right now, and I got a call today from a client who mystified because their pre approval that they were told was going to be there waiting for them at their bank, wasn’t. So, I wanted to clarify what exactly a pre approval is, as well as what “underwriting” is, in relation this concept.

So, backing it up, “underwriting” is the process whereby a bank actually looks at your application. They look at your documents: job letters, etc… and make sure that all of these details add up. That your paystubs are in line with what your job letter says; that your down payment is coming from own resources, and if isn’t, then they have to find out where IS coming from. Based on all of this process, they underwrite, and come up with an assessment of risk, and this is a time consuming process and is something that the banks spend a lot of money on staff to review paperwork, to review a deal, to work through the numbers and the nuts and bolts of a deal.

If you are trying to buy a property and you go to your bank and you get a pre-approval, you assume when they give you that piece of paper and it says “$265,000” on it, and you’re holding that up to your realtors saying, “I’ve been told that I’m pre-approved for a mortgage of $265,000!”

But, you go and write an offer and then all of a sudden your banker is telling you, “well, you know, actually your job letter didn’t say this that or another thing,” and you may have even provided that job letter up in advance and are wondering, “well then, what was the point of all this exercise?”

So, what is a pre-approval?

A pre approval is JUST the lender taking a cursory look at application, as it stands, and saying, “IF, the documents that you provide us later on, when we review them” (because they NEVER review them for a pre approval – that’s our job as brokers is to make sure your paperwork says what you’re telling us it says – very commonly a client will say they make $60,000 per year and they have been on the job for maybe 11 months, and truth be told, when we look at their paystubs they are on pace for about $60,000. When we get the job letter, it may show $35,000 base salary with bonuses or overtime or commissions or what not. Because you’ve got only 11 months of track record, you won’t be able to use that bonus money. You’re going to need to use a two year average. Now, if you weren’t making $60,000 beforehand, you can see how that average could be maybe misrepresentative of your real value or your real income but IT’S WHAT THE BANKS WILL USE WHEN QUALIFYING YOU.)

So, when you get a pre approval , what differs with me versus another broker or your bank is that I WILL UNDERWRITE the file. I will look at all of your documentation up front. I will insist that you provide me with job letter, paystub, statements of your bank account, down payment confirmation, gift letters if it is appropriate, statements from your various credit cards and loans and lines of credit. I know how the bank is going to look at it, and I can make sure that everything I provide you in my pre approval when it says “$250,000” or $265,000” so that when you actually write an offer, the bank honours that amount.

For the Mortgage Center, I’m Rowan Smith.

Can You Extend Your Pre-Approval Rate?

Thursday, August 6th, 2009

Given that rates were at the lowest point EVER back in May/June (around 90 days ago in some cases) several people are starting to face their pre-approved rates expiring. Today’s rates are around 0.50% – 0.75% higher than they were previously so, naturally, clients are asking me if they can extend the pre-approval period.

The answer: No.

The bank gives you 90 or 120 days (depending on the bank) where they will hold the rates for you. If rates fall, you get the lower rates. If rates rise, you get the lower rates. They put you in win-win situation. However, they will not extend that period of time by even ONE day.

So, if your broker tells you that you have 90 or 120 days to find a place, or for your rate to be held, you will need to actually close on the transaction by that date, not just write an offer.

I want to write this out again because it is important, and a cause for confusion amongst applicants regularly: you need to CLOSE (money changed hands) by the rate expiry date on your pre-approval, not just write an offer.

Notice that I didn’t make any mention of “possession” in that sentence. Typically, for example, completion will be on the 1st of the month, with possession on the 2nd. It is the “completion date” that matters for your pre approval. Many times, people complete on, say, the 1st, and don’t take possession (get the keys) until the 15th of the month. This can happen for a variety of reaons: have to honour their current lease, trying to close quickly to preserve the rate but the sellers don’t want to move that fast.

So, talk to your broker and realtor (they should be a pair that works together) about setting the completion date within your pre-approval rate hold period, and then set the possession accordingly. It may save you tens of thousands of dollars to take the time and go through the effort.

Questions? Email me directly at smith.rowan@mortgagecentre.com

Thanks for reading!

No More Pre-Approvals? They May Be A Dying Breed…

Wednesday, June 24th, 2009

It’s happened 3 times in the last week, another lender halting the issuance of pre-approvals. The most recent culprit: TD Canada Trust.

This comes on the heels of ING Direct, Vancity, Firstline Mortgages, and a whole host of other peripheral lenders who have also stopped issuing pre-approvals.

So the first question everyone asks is, “Why?”

Two reasons:

1. Hedging costs
2. Unusual, historically high volume of real deals

We’ll come back to these later, but first, some preliminaries:

Let’s define what a pre-approval is, as there is a lot of misunderstanding in the media and amongst the public. When you submit an application to a broker, or lender, and they issue a pre-approval, most clients think they can rely on it. They can’t. When a bank issues a pre-approval it is always, “subject to satisfactory verification of income,” and, “subject to satisfactory confirmation of down payment,” and many other things. Even if you get your income confirmation and other documents together, the lender doesn’t look at them.

This means that a pre-approval is just a “rate hold” and is the lender’s way of saying, “assuming the information you put on the application lines up with what is on your documentation, then we will approve you for X, Y, or Z amount.”

It does NOT mean that you can write an offer without subjects for financing. It does NOT mean that the lender has verified your income, underwritten the file, and signed off on it. All that it is, is a rate hold for 90 or 120 days (depending on the institution).

Why don’t the banks verify income and all that? Because probably 8 out of 10 pre-approvals never become “live” or “real” deals. It would be a collossal waste of time to spend the hours working on files that only have a 20% chance, approximately, of closing. Lenders are dramatically over-worked in the current market, and they aren’t going to take their valuable man hours off of real deals to put them on pre-approvals which have a low probability of converting.

My job, as a mortgage broker, is to get you a pre-approval (if that is what you are looking for) and provide a list of documentation that the lenders will ask for to support the application. Then I, the broker, review the documents the same way as a bank would and can let you know if your pre-approval will “hold up under fire,” or, in other words, hold up when you write offer.

As a broker, I CANNOT guarantee that the financing will be approved because I am not the lender: I am just the middle man and the lender won’t underwrite (fully review) a pre-approval. I CAN tell you the probability of the banks approving your mortgage and can get you to collect additional information if it is warranted.

So, let’s get back to the resaon banks are cancelling pre-approvals all over the place. I’ll give you the first two reasons, and then my own personal opinion on reason #3.

HEDGING COSTS:

When a bank issues a pre-approval at, say, 4.29% on a 5 year mortgage, they are taking a risk that the rates could rise and they could be left holding the bag and getting you to pay only 4.29% when they could be lending it out at, say, 4.49% if they hadn’t issued a pre-approval. This is an element of time risk that is inherent in the practice of issuing pre-approvals.

To mitigate this risk, the banks “hedge” against this happening by buying derivatives or bonds in the open market to offset this risk. There is an inherent cost to doing this (transactional costs) that my only run a few hundred dollars per pre-approval, but add that up over $100,000,000 of pre-approvals and only 20% of them funding and that cost gets very high. (These numbers are just an example, but you get the idea).

UNUSUAL, HISTORICALLY HIGH VOLUME OF REAL DEALS

The number of transactions going on in the market today is incredible. After an absolutely dead winter period, there was a lot of pent up demand and with rates falling, and prices falling, the market exploded in late March and hasn’t looked back since. The lenders are so busy that we are getting 14 day turnaround from submission of a deal to an answer at a few lenders, and longer in other cases. There are a few lenders that are able to meet usual deadlines, but their rates are often a little offside (high) and this accounts for their lower volumes.

MY PERSONAL OPINION

My own personal opinion is a bit more revolutionary that the above conventional explanations, so here goes:

I believe the banks are dead certain that rates are going up, and they don’t want to offer clients pre-approval rate holds in the event that rates rise dramatically and they are stuck offering the old lower rates. My evidence for this claim? Look at the current 1 and 2 year mortgage rates which are 2.75% on a 1 year and 2.85% on a 2 year. If banks can entice a client to take a shorter term, they will face (likely) much higher rates at renewal and the banks will extract their profit at that time. Think about it: if the rates were going to go up, wouldn’t it make sense for the bank to offer great short term rates in the hopes of making a far greater return in the future once rates have risen? For a bank, long term thinking always pays off.

So, will pre-approvals dissappear all together? I have my doubts. They represent a solid method for lenders to solidify client business, and many home buyers expect to have some idea of what they can afford, in writing, before wasting a realtor’s time running around looking at properties. That said, the market has changed fundamentally, and don’t be surprised if you start getting pre-approvals from lenders you haven’t heard of as most of the big banks have stopped issuing them in the interim.

Until next time…