MORTGAGE PRE-APPROVAL vs. MORTGAGE APPROVAL: What’s the difference? (and why both are important!)


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

2 thoughts on “MORTGAGE PRE-APPROVAL vs. MORTGAGE APPROVAL: What’s the difference? (and why both are important!)

  • How is your experience with the entire pre-approval and approval process? And did you actually switch lenders, or did you actually get denied?

  • Very good to know! I had no idea about the Bank can turn down the mortgage b/c they don't like the house. I will keep this on my radar. Thank You!

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