Advantages and Drawbacks of Mortgage Pre-Approvals

November 3, 2015

Pre-ApprovalsGetting a mortgage pre-approval can pay in today’s fast-paced competitive market. But as intelliMortgage co-founder Rob McLister explains in this Globe and Mail article, they’re not without pitfalls.

A pre-approval’s biggest allure is its 90- to 120-day rate hold. A locked-in rate protects you if interest rates rise while you’re home hunting.

If you find a better mortgage in the meantime, you’re not obligated to stick with the lender that provided the pre-approval. Albeit, you’ll need to totally reapply and resubmit documentation if you change lenders.

Pre-Approvals: Beware

There are key points to be cautious of with pre-approvals. For one, don’t rely on them as a substitute for a “subject to financing” clause in your purchase offer. That’s because pre-approvals do not constitute a final approval and do not include a property appraisal (which is mandatory for final approval).

While some lenders will confirm a borrower’s qualifications and documentation during the pre-approval process, most will simply guarantee an interest rate for a specified period contingent on you qualifying when your actual purchase offer is made.

In the latter case, any number of issues could pop up, including last-minute financial, property or legal problems that could scare away lenders. Even missing one bill payment after you’re pre-approved could invalidate your pre-approval. So could adding to your debt load or changing jobs.

Here are a few other considerations:

  • You will almost never get the market’s best rates with a pre-approval. Period. It doesn’t matter which broker or lender you use.
  • Lenders charge higher rates on pre-approvals because they take the rate risk and because so few pre-approvals close
    • Lenders incur un-recouped costs with most pre-approvals. Reason being, over 3 out of 4 pre-approvals never close because the customer finds a better rate elsewhere or cancels their purchase plans.
  • The interest rate premiums on pre-approvals are up to 0.25 percentage points more than the lowest market rates for a given term.
    • Of course, if rates soar 0.50 percentage points before you close, that 0.25 will seem like a bargain!
  • Pre-approvals are rarely available (at good rates) on switches, refinances and rental properties.

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