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Not All Pre-approvals Are What They Seem!
Jim and Jane Smith decided it's time to buy their first home- an apartment condo. They had been thinking about buying for a while and were concerned that if they delayed much longer the condo prices would be out of reach in this hot market. Jim felt fairly comfortable in his new job in the parts department at an auto dealership. He had started his job 6 months ago and had already received a raise. Jane has been working as an assistant manager for a major retailer for the past 3 years. They spoke to a bank representative, provided some basic details about their income and the funds available for the 5% down payment. The bank representative indicated that Jim & Jane were qualified to purchase a condo. The very next day, Jane came home with several real estate magazines and newspapers and started calling all the ads for condos. After speaking with several real estate agents, Jane made an appointment to go see some properties the next evening.
When Jim and Jane arrived at the real estate office, the first question the Realtor asked was "have you been pre-approved for a mortgage?" to which Jim answered, "Yes, we spoke to our bank and we qualify for the price we're looking for". With that said, out they went to look at homes. Over the next three weeks, Jim & Jane were out twice a week with their Realtor until…lo and behold, they found a perfect condo. They put in an offer, which was accepted by the vendor.
The next day, they approached their bank for the financing. The bank input the application on the computer and sent it "down-town" for approval. For the next several days, Jim and Jane spend all their free time looking at furniture, paint and visualizing everything they're going to do with their new home. Excitedly, they call their friends and relatives to describe the layout, location and amenities of their new home.
Three days later, Jane gets a call from the bank indicating that their mortgage application had been declined. According to the bank, Canada Mortgage & Housing Corporation (CMHC) had declined the application because Jim didn't have the minimum required time on his job - one year. Disappointed and embarrassed, Jim and Jane decide to abandon the idea of home ownership for a while and continue renting.
Lack Of Knowledge
In many cases, pre-approvals are simple calculations that are done based on basic information supplied by the buyer. Quite often, the quality of the information obtained is poor due to the lack of knowledge by the buyers and/or the loan officers. This is not to say that all loan officers are not knowledgeable in mortgaging criteria. Due to time constraints or the need to be knowledgeable in many different banking products (sometimes as many as 200+), loan officers may miss critical pieces of information that could make the mortgage approval a reality. Time and time again, we see situations where the mortgage application is delayed or declined for unwarranted reasons. The end result…annoyed and embarrassed buyers, annoyed & frustrated vendors and tired and disappointed Realtors who spent the last three weeks working diligently to find that perfect home for the buyer.
Our story could have had a happier ending. If the Smiths had contacted a mortgage broker right at the start, the broker would have made them aware that the short-term employment was an issue. They may have been able to ask their parents to be co-borrowers on the loan as a way of strengthening the application. Speaking with a mortgage broker, prior to home shopping, is a smart way to eliminate many obstacles that may arise during the mortgage financing process.
Mortgage brokers work with the consumer to arrange financing that best suits their needs and it usually doesn't cost the consumer any fees. The brokers are paid a commission by the lender for placing mortgages with them. A brokerage fee only applies if the mortgage application doesn't fit standard qualifications.
The brokers of today have access to 30 plus lenders including most of the major financial institutions that you find at most street corners in Canada. More lenders means more competition for your mortgage and that usually means better rates and terms for you. For the lenders, this is also a very efficient way of adding to their mortgage portfolio. They only pay a commission to the broker when a mortgage funds. Lenders eliminate the bricks and mortar costs of bank branches and all other costs associated with originating mortgages, in branches.
In the U.S. in 1992, 25% of the mortgages were processed through mortgage brokers. By the year 2000, that statistic had risen to approximately 70%. The Canadian mortgage market seems to be heading in the same direction. At the end of 2001, mortgage brokers had 25% of the market share in Canadian mortgage origination. A recent CMHC study indicates that by 2005, mortgage brokers will have 50% market share in mortgage originations.
The mortgage industry in Canada is changing (for the better) and the mortgage brokers are the catalyst for this change. As the consumer becomes more aware of the value proposition of what a mortgage broker brings to the table, many more of you will start using brokers and recommending brokers to your friends and relatives. This means the negative home shopping experience Jim and Jane had, will increasingly become, a thing of the past.
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