Financing clauses and Pre-approvals

There has been a strong trend recently for people considering buying a home to get a pre-approval for a mortgage. This is an excellent idea and can be a great help when looking for a home. But what exactly is a pre-approval? It depends a lot upon who you are talking to. Often when a buyer comes to me with a pre-approval in place they feel pretty confident that they no longer need to include a “subject to financing” clause when they make an offer. Nothing could be further from the truth.

Some banks consider a pre-approval to be nothing more than a rate-hold, that is, an assurance that if a buyer comes back to them within 60, 90 or sometimes 120 days they are guaranteed a specified interest rate as long as they qualify for a mortgage. Note the “if they qualify for a mortgage” part.

A mortgage broker may go further and take the time to check out a potential buyer’s finances. They may take statements about current debt, assets, income and savings. Using this information the broker will give the potential buyer a good indication of the amount of money they can spend on a house, how much they need for a down payment and explain what monthly payments could be.

A dedicated mortgage specialist for a large bank may do all the same work and even provide a written statement explaining the terms and conditions for a mortgage, how much they are able to spend and what the rate will be for a specified period of time.

In all of these cases the potential buyer has some valuable information to work with, but in none of these cases is the buyer assured of a mortgage. Anyone who would consider writing a subject free offer is taking a huge risk and if their Realtor goes along with it he or she may well be breaching their fiduciary duty to the client.

Most pre-approvals are guides that allow a buyer and their Realtor to have an idea of what price range to look in. They can fall apart at the last moment because someone changed a job, maxed a credit card or the property they are interested does not appraise well.

Getting a proper pre-approval done is worthwhile however. It will educate the buyer to the financial process and the costs involved in buying a house. It will alert the buyers to possible credit issues that may easily be addressed, and of course it will allow the buyer to target the right price range for their new home.

If you are willing to write a subject free offer then make sure you have enough cash in the bank to pay for the whole thing and all the attendant costs. But give me a call first, I’d like to take you shopping for property.

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