Mortgage pre-approval and pre-qualification
Although optional, mortgage pre-approval and pre-qualification are tools that can prove useful to the buyer.
Mortgage pre-approval
Mortgage pre-approval enables a lender to analyze the client’s financial situation in order to estimate the maximum value of the loan that could be granted, as well as the conditions of this loan. This requires the buyer to submit the necessary documentation. The lender who provides mortgage pre-approval can guarantee the interest rate and other terms of the loan for a given period, usually ranging from 60 to 130 days.
Pre-approval is a form of commitment by the lender. At the end of this period, the pre-approval is no longer valid, and the buyer who still needs it must renew his application.
Mortgage pre-approval can be an important competitive advantage for clients looking to buy property in certain hot markets.
It is important to know that pre-approval does not constitute final approval of the loan, which may take into account other data, such as mortgage collateral.
► DUTIES AND OBLIGATIONS OF THE BROKER
Important!
A broker representing a buyer must advise him on the price of the desired properties. He must remind his client that the amount of the loan may not cover certain expenses, such as closing costs, moving expenses, certain maintenance or renovation costs, the broker’s fee if he wishes to add it to the financing, etc.
Documents required for mortgage pre-approval
Under clause 6.2 of all promise to purchase forms, the buyer is required to provide the seller with a copy of an undertaking from a mortgage lender to grant the amount of the loan requested. This undertaking must be real and unconditional.
The broker must verify the document confirming the lender’s undertaking, which must contain the following information as a minimum:
- The name and address of the lender;
- The name(s) of the borrower(s);
- The address of the property being applied for;
- The amount of the loan or the fact that the loan has been granted for an amount equal to or greater than that provided for in the promise to purchase;
- The name of the loan officer and the contact details of the financial institution (no signature required).
For more information, read the article Mortgage approval: The required document.
Mortgage pre-qualification
Mortgage pre-qualification is a non-binding estimate by a lender or mortgage broker of a person’s maximum borrowing capacity. It can be a useful tool for buyers who are just starting out on their acquisition project and want to have a rough idea of the price range of properties available to them.
► DUTIES AND OBLIGATIONS OF THE BROKER
The real estate broker can perform a pre-qualification calculation, but he must be very careful, as this could engage his professional liability. Under no circumstances does his estimate constitute a professional opinion of the client’s credit situation.
Instead, the broker should advise the client to consult a mortgage professional, and then accompany the client in the search for properties once his borrowing capacity has been established.
! GOOD TO KNOW
For both pre-approval and pre-qualification, it is a good idea for the broker to ask the client whether the result obtained takes into account a Mortgage Stress Test. This is a simulation of the buyer’s borrowing capacity in the event of a 2% rise in the estimated interest rate.
Since January 1, 2018, borrowers who finance their residential real estate purchase without mortgage insurance (as is often the case when the borrower makes a down payment of 20% or more) must also be stress-tested by their mortgage lender. This amendment to Guideline B-20 was issued by the Office of the Superintendent of Financial Institutions.
Under this test, borrowers must demonstrate that they are able to repay their mortgage at the higher of the following rates: their mortgage contract rate plus 2%, or the five-year fixed rate posted by the Bank of Canada. Until now, this test was mandatory only for borrowers with mortgage insurance.
