If you are reading this blog, the first thing I want to tell you is this. Pre-approvals are conditional. Too many of you are treating your pre-approval as if it were written in stone. It’s not. Changes in the market and to the rules can come slowly, or, as we’ve seen more recently, in a hailstorm of provincial red tape. And you, dear reader, are powerless to stop it. In fact, the only thing you have on your side is preparedness and, well, me if I’m your broker. Let’s look at the truth about your mortgage pre-approval.
THE WINDS OF CHANGE
They really should add a third component to the things in life that can be counted on. Bureaucracy. While not the fastest wheels in motion, changes to rules and regulations are as sure as the sun rising. Just this year, new mortgage rules announced by the Canadian government make a perfect case for what can happen from the time a pre-approval is made.
Your success in buying a home depends greatly upon at what speed things move from the time you get your pre-approval. For those who have or will buy a pre-sale home, many things can change from the time your home is constructed. Assuming construction goes smoothly and without delays, I have never seen a home bought and built in 4 months. And yet, this is the average period of a pre-approval. A new home on the other hand, usually takes about 3 years to build, usually with delays up to a year. You need not be a mathematical genius to see what I’m getting at here.
In this scenario there are 2 years and 8 months between the time you received your pre-approval and the completion of your home. And in the real world, any number of unforeseen circumstances may occur during this period. I’ve seen people demoted, lose money on investments, incur unexpected expenses, and a long list of other things I won’t depress you with. The short of it is that life happens. And you need to be prepared for the possibility that your situation today may not be the same one or two years from now.
DON’T BET YOUR SHIRT
If you’re barely qualifying for a home right now, don’t go for it. That’s my honest advice. You need to have wiggle room for any conceivable changes that could arise. Without it, you may indeed buy a home, but you may not keep it.
In my professional life, I have seen clients get a pre-approval from one of Canada’s biggest national lenders, and months later be declined for a mortgage loan. Today this is even more likely with the increasingly strict regulations that have been introduced. Take for example the new “stress test” to be applied to every insured high ratio mortgage. Introduced as a tool to ensure the buyer can continue to afford the home if interest rates rise, it means you must qualify for the Bank of Canada’s 5-year fixed posted mortgage rate. This rate is taken as an average of the posted rates of Canada’s 6 largest banks and, all too often, is beyond reach for the homebuyer.
LET’S TALK PRE-APPROVAL
If you have dreams of buying a home, do not let this post deflate you. This is a cautionary tale on pre-approvals and getting your hopes up. No one wants to lose their home, or worse still, their shirt in the process. A pre-approval is just one step to the journey of home ownership and should be regarded as such.
If you would like to talk about the possibility of owning a home, feel free to contact me. I pride myself on offering impartial advice, and being a champion for all my clients.