A pre-approval letter is something you secure from a lender in order to go house hunting. There are generally two ways you can get a pre-approval. You can go to a bank directly and deal with a mortgage specialist. This person will generally get enough of your personal information to pre-approve you for a house. The second way to get a pre-approval is to go through a mortgage broker. They will also take your personal information to pre-approve you; but when youre dealing with a mortgage broker they deal with many mortgage lenders so in most cases they will go into more detail in order to secure the best rate for your situation.
Whether you are dealing with the bank directly or a mortgage broker you must be sure that you have an actual pre-approval and not just a pre-qualifier. The difference is that with a pre-qualifier a mortgage specialist has just asked a bit of personal information and based on what you said they give you an opinion that you should qualify. With a pre-approval they will find out about your job, length of employment, income, type of employment and credit history. They will make sure that you can provide proof of the information you have given them and based on this they will issue a pre-approval. You should make sure that this pre-approval is based on a credit report and verification of all other financial information.
A pre-approval is not a firm letter of commitment from a lender. It holds the rate of mortgage for 120 days so that if the interest rate increases while you are finding a house it wont affect you. Most pre-approvals are contingent on appraisal of the home you want to buy and re-verification of your credit and income. Pre-approvals make a buyer look credible to agents and sellers and they smooth the whole mortgage process.
The most important thing to remember is when you find a house that you like and decide to put in an offer, always put a condition in the offer that gives you a week to obtain financing even with a pre-approval. Do not waive this condition because you have a pre approval; if for some reason the bank declines the mortgage you are still legally bound to purchase the house. In this situation you become vulnerable to a law suit or forced to accept a private mortgage at extremely high interest rates costing you thousands of dollars. The bottom line is if you want to protect yourself never waive that financing condition until you have something in writing from the bank stating that you can do so.
Now that you have found a house and your offer to purchase has been accepted you go back to your mortgage specialist with this document and they will now submit your application of a mortgage for a full approval from the mortgage lender. The lender will approve the property you want to purchase and re-verify your financial information. As long as nothing has changed they will generally issue an approval for your mortgage. Be aware that in Ontario a mortgage approval is only firm as long as all of the conditions of the loan are met right up to the day of closing. This means that after you get your approval you need to provide the proof to verify your personal information. This also means that you should not change your financial situation until after the deal has closed. Dont take out loans to purchase things for your home because this changes your financial situation and there is the possibility that the mortgage lender might back out of the deal.
Purchasing a home is probably the largest financial commitment you will make and if you understand the process and follow the procedure it will be your most enjoyable and exciting purchase.
There's no question the mortgage industry has changed dramatically since the beginning of 2007. Subprime mortgages are now as rare as gold, and credit requirements have become much stricter. Alt-A mortgages too are hard to come by. Many large mortgage providers have seen profits markedly down, and some have even closed their doors. And sadly, a lot of homeowners are now struggling to pay their adjustable-rate mortgages and keep their homes.
But no matter how much an environment changes, some things stay the same. Those outrageous advertisements offering unbelievable home loans are still being used by a minority of mortgages companies to draw in new customers, even as their previous customers are being foreclosed on because they were sold a loan they didn't expect or understand.
The Ad Constant
Such ads are rarer than they were a year ago, because quite a few of the companies which depended on them for bringing in new business have moved on to more profitable industries or simply shut up shop. But they can still be found, lurking on websites big and small, and tempting desperate homeowners into taking the bait.
Fortunately, such ads are usually easy to detect. Many use interest rates or monthly payment amounts to snare and impress readers who might otherwise see little gain from such a product. More importantly, these ads use numbers which are ridiculously agreeable, and at face value seem to include very few requirements.
Warning Signs
But promises of a $500,000 mortgage for a few hundred dollars a month should have you running the other way. Why? Because these kinds of loans are invariably driven by adjustable rates, depend on an astonishingly low teaser rate, and will result in a huge jump in minimum monthly payments once that teaser rate has expired after a year or two.
One way people determine whether an ad is shady or not is to scan for fine-print at the bottom of the promotional message. The assumption is that if there's a lot of tiny conditional text there are catches, whereas no or very little fine-print means an honest deal.
But this assumption is seriously flawed. The nuances of advertising regulations allow advertisers to side-step the traditional checks and balances many people are used to. Look carefully at a mortgage advert on the web and you might see minimal fine-print like "some restrictions apply". But the exact details of those restrictions aren't given, at least not on the same page where the ad appears. Instead they're buried at the bottom of the target page - the page you are taken to once you click on the advert itself.
Additionally, the final fine-print might not deal with the technical details of the loan as you would hope. Some only cover aspects like teaser rates and prepayment penalties in a vague and noncommittal way. Others don't mention them at all.
One other important development in mortgage advertising is the use of the term "fixed rate". Since the subprime shakeout, adjustable rate mortgages have become vilified and viewed as dangerous by many. Sometimes this reputation is unjust. But regardless, it has posed a problem to deceptive advertisers. Their solution has been to bend the truth about the product they're offering and substitute "adjustable" for "fixed". In their eyes the mortgage is fixed because the payments won't change for the first year or so that the teaser rate is in place. But they deliberately don't acknowledge that after the teaser rate has expired the payments will start shifting, often upwards.
New Trends, Same Old Risks
As the mortgage market has stuttered, law makers and industry leaders have stepped in to curb bad business practices. Teaser rates and prepayment penalties, which have been the undoing of many unsuspecting homeowners, are now frowned upon. And reports of dubious mortgage origination practices like exaggerated income statements or bait-and-switch offers are rigorously investigated.
Some argue that given these developments such questionable practices must no longer be possible. But sadly, they are. No matter how the mortgage climate changes there will always be companies who choose to use advertising in questionable ways. Worse still are the unscrupulous small-time opportunists who try to fly below the radar, or who operate to make a quick buck from unsuspecting customers and then slink away into the night.
Companies like America's Lending Partners have tackled the problem of dubious ads head-on by trying to educate consumers that some mortgage ads can be harmful to their financial health. They placed an ad on their home page promising a $490,000 mortgage for only $99 per month. But when someone clicks on that ad they are told "Don't Believe Everything You Read!", and are warned as to the dangerous nature of such promotions. The strategy has yielded some interesting calls into their customer service department from small-time brokers and loan officers who had hoped to ensnare unsuspecting homeowners with an obviously toxic mortgage.
Conclusion
When shopping for something as major as a home loan it's important you approach the process methodically. When it comes to advertising, don't jump at numbers or be sold by a flashy message alone. Look at the fine-print and check the credentials of the company making the offer. Educate yourself and do your research. The time invested will probably save you thousands of dollars down the road.
Both Ben Needles & Andrew Carey are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Ben Needles has sinced written about articles on various topics from Business Credit Cards, Anger Control and Business Credit Cards. About the Author (text)As a mortgage consultant I specialize in assisting clients obtain mortgages. Whether you are looking for a new home and want to get pre-approved or get rid of debt, a mortgage broker is the answer. For more info. Ben Needles's top article generates over 550000 views. to your Favourites.
Andrew Carey has sinced written about articles on various topics from Finances, Finances. Andrew Carey works at America's Lending Partners, a leading online mortgage business that has been providing homeowners and home buyers with a variety of resources and mortgage services since 1999. For more information please visit:. Andrew Carey's top article generates over 1900 views. to your Favourites.