By Aleksandra Oleksak, The Real Estate Chick
When buying a home, one of the first steps you will do is receive a mortgage pre approval to see how much you can really afford. Once you have found the home of your dreams, you will need a mortgage approval. But just because you have received a pre approval, does not necessarily mean you will be approved once you’ve made your purchase. So what’s the difference? Let me break it down for you.
A bank or mortgage broker will run a credit check on you, assess your credit worthiness and take a look at how much debt you have in comparison to your income. This is important as pre approvals are given based on certain ratios: your GDS (gross debt service) & TDS (total debt service). Some exceptions are given on these numbers, based on high credit scores, but generally they cannot exceed 32%/40%. If everything falls in line, then you receive a pre approval for a certain amount and now you can go shopping!
Once you have purchased a home, you will send the agreement of purchase and sale to your bank or mortgage broker to begin the approval process. The bank and CMHC will determine if they like the property and are willing to lend you money based on the purchase price. If the bank is satisfied with the home and with the information you gave them during the pre approval, then they will give you a conditional approval. The conditions can be: employment verification, paying off certain debt before the closing date or an appraisal on the property, just to name a few. At this point if your offer is conditional upon financing, I would highly advise against waiving your financing condition based on a conditional mortgage approval as you are not at home base quite yet.
This is the best type of mortgage approval that you can receive. A firm approval means you have satisfied all the banks conditions and the bank has given you a solid yes to the mortgage on a specific property. At this point you can do the happy dance and waive any financing conditions you may have on your offer. This does not mean you can go ahead and rack up debt between the firm approval and the closing date. The bank may pull your credit once more before the closing date to make sure nothing in your credit worthiness has changed substantially. If it has, they do have the right to pull the mortgage right from under you.
At the end of the day, these are all pretty standard procedures that are usually happening in the background, so you don’t need to stress. It’s important to know which kind of mortgage approval you have received and what they all mean before waiving any financing conditions on an offer. As stated at the beginning, ‘the banks decision can change as you are going through each approval stage and a prudent buyer should have a general understanding of this and know which questions to ask not only to the bank, but the realtor as well’.
Aleksandra Oleksak is Her City Lifestyle’s “Real Estate Chick,” and a Toronto real estate professional with Sage Real Estate. As @RealtyQueenTO, her real estate blog has been named one of the top 50 real estate blogs in Canada.