- In this video, you'll learn the differences between
a pre-approval and an approval,
when they're used, and actually,
if you can switch a lender after you get pre-approved.
That's starting right now.
- [Narrator] Welcome to Homebuyer's School
brought to you by Brookfield Residential.
- Hi everyone, I'm Karl.
Welcome to another Homebuyer's School video,
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So, today I'm joined by Mujtabe Syed,
Mortgage Specialist with the Bank of Montreal,
and the question we're gonna answer today is
So, what is the difference between
a pre-approval and an approval?
I know there's some confusion about,
hey, if I got pre-approved, I should easily get approval,
which is not always the case.
- It could be the case sometimes,
and it could be not the case at all, right?
So, what a pre-approval does is that we approve you
as an individual, as a couple,
whoever looking at buying a home as themselves.
Now, final approval will come when you find the property
which is one of the five C's of credit that we talked about,
which is collateral.
Which is a very, very important part of it because
that is what the bank is using as security.
So, final approval will consist of actually approving you
and the property now as well.
Now, if the bank doesn't like the property,
don't take that as any slight against you,
it could just be the fact that
hey, the bank didn't like the property.
Some other situations has happened,
where circumstances where you get pre-approved,
you find the property, the property's approved,
but you also don't get a final approval
because it's subject to insurance approval,
which is what we talked about CMHC approval,
genworth approval, counter guarantee approval
when you're putting less than 20% down.
It has to go with your approval twice.
One will be with the bank
and then the next will be the insurance provider.
And the reason why their approval is so important
is because they're actually providing insurance
on the amount that's borrowed.
So, without the insurance approval we can't do anything.
So, you might have been pre-approved
but we also cannot sent a deal to the insurer
without having a property in place
'cause they don't look at just pre-approvals
the bank will look at the pre-approval
you find the property,
and then we send it to the insurer for an approval
and they might come back and they might not like the deal.
But they might come back to you and then say
"listen we need to restructure this deal".
Restructure just means, let's change the dynamics
of this deal.
Let's add a little bit more down payment.
Let's pay off some more debt.
Let's add a cosigner. Let's add something else.
So, they might come back to us
with a lot of options and usually they do.
In a good scenario we'll still get an approval
done that way.
But they could come back
and just not like to file at all.
But we do have options, right?
We do have access to three other insurance companies
clients will ask me, "we got declined for one,
is it a good chance we get declined from the other one?"
and I would say not necessarily.
Every insurance provider,
even though they have certain guidelines
they'll look at their underriding practices
a little bit different.
So, it's always worth trying it with all three insurers
to see where it fits.
Now if all three of 'em don't get approved
then unfortunately you're out of options at that time,
and then maybe we just have to wait a little bit
so we can do some little credit coaching at that time,
maybe get a little bit more saving down payment,
and then get you back into the whole buying process again.
It might be very disheartening
to didn't get the approval you were looking for,
but the second time around the chances are a lot higher
of getting you approved because now we've mitigated
any of the risks that your file has.
The approval process it's different
and it varies per circumstances and per clients
and insurance companies.
- And if you wanna know more about mortgage insurance
I'm gonna leave the video up here
and in the description below as well.
When you mentioned a bank doesn't like a home,
you might have to get another lender,
what does that mean?
- So technically like one the most important things
all of the five C's of credit is collateral.
This is technically what the bank has for security
for the money they've lent to you.
Now if that is a home that is not gonna last 25 years
right? - Mhm
- Let's say the life of the loan is 25 years,
but the bank has an idea
that this house is gonna fall apart in 20 -
- Oh, okay.
- there's five years of risk there that they're-
well what happens if the house falls apart
and you decide not to pay your mortgage,
- There's no collateral.
- what is the bank gonna do for those five years?
(Karl laughs)
right? There is not a lot they can do.
- Yeah
- Or the fact that they might come out like-
I've had this situation before where a client
was getting an amazing deal on a house right,
and we found out it was a grow operation,
(Karl laughs)
So, what a grow operation unfortunately is
somebody who is into illegal activities in the house
they were growing something that shouldn't have.
Usually when its a grow operation or grow-op
there is usually a lot of mold issues, right?
So it becomes a hazardous place to live.
So when a bank finds out about that,
they're not gonna wanna lend to that
no matter how structurally sound the house is,
because there could be a lot of underlying issues
that you're not gonna find
that could be unhealthy even for you,
for your family, for your children what ever it is,
it becomes a health hazard.
They might not like it for that reason.
There might be another situation
where let's say they find a house
and they feel like it's overvalued.
So, that means that their collateral is not ideal.
So lets say someone selling a house for $400,000
but the appraisal only comes out to $350,000.
Why would the bank lend something
that the value is just not there.
And on top of that to bring that to your attention
and say "why would you wanna buy something
that you're over paying by $50,000.
We just don't see the value there".
There's multitude of reasons why they don't like property
but the biggest reason is it doesn't fit their criterias
for a collateral.
It's not good enough for them to put their security on
so they can actually recoop their cost
in that worst case scenario.
- So, if the bank doesn't like the collateral,
the home that you have selected,
and if you go to another lender,
Do you have to go through the entire process again?
Get a pre-approval, get approval,
or are you just, you know, at their approval stage?
- In most cases lender doesn't like the collateral,
clients stay with that lender
and then they might agree with the lender
and say I don't like this collateral either.
- Oh, okay.
- Right?
And they might just go and find a new home
that actually fits their needs and fits the banks needs
and you go ahead.
Very seldom chances will clients absolutely love that house
and they don't agree with the banks reasoning for not,
then yes they can go to a different bank
and they will have to go through
the whole process all over again
and then start doing that,
but it's very seldom that happens.
For a bank not to like a collateral it has to be significant
and if they actually provide that information
or prove to you if it makes sense to you
then you would also not want to, right?
Because it is also your investment as well,
not just the banks.
- Can you switch a lender after pre-approval?
- Yeah, absolutely, yeah. - Yeah
- So a pre-approval, once again, right?
It's just tied to you, it's not tied to a property.
You can even switch lenders for final approval.
Let's say you're building a brand new home,
and your build process is taking 10 months.
You start with your bank and then you realize later on
the rates are not the best with this lender,
you don't like the terms and conditions,
but you haven't signed anything yet, right?
You haven't signed on dotted line 'til ten months.
You can switch your approval within that ten month period.
You have time to do that. - Mhm
- So, you are not locked in
'til literally your first payment is reduced.
Or 'til the bank actually lends out money
for the transaction to be closed.
I've seen some extreme cases
where clients have switched at the very very end,
at the lawyers.
So lawyers have - Mhm
- two sets of documents from to different lenders, right?
And then they will ask the client and say
"which lender do you want to go with"
and they will tell them and the other lender
just kind of steps away.
So, it really just depend on a case by case scenario
but you can switch 'til the mortgage is advanced.
If the mortgage is not advanced
you can switch to a different lender at any time.
- What are some reasons you would actually do that.
- It could be the fact that you
weren't comfortable with the rate.
The lender is not looking at budgeting at the rate
you find that the other lender
is wanting to be more flexible with the rate.
You feel like they're gonna give you a better rate,
better terms and conditions on your mortgage.
It fits your budgeting guidelines a lot better
than let's say lender A.
Or you could just find more comfortable
dealing with the bank.
You could switch for all those multitude of reasons.
- Just in terms of a credit question,
does your pre-approval affect your credit score?
- Yeah, so like your pre-approval
is not gonna affect your credit, once again,
if you only do let's say one or two, right?
But if you're gonna do 10 different pre-approvals
- Yes
- And you're gonna do ten different credit checks
and then the credit bureau is thinking
"why is a client going to a sixth bank
if they got approved for the first four?"
- Mm
- A credit score is your risk score, right?
That is what the bank looks at.
It is a way for us to assess you individual on a risk basis.
And we take a look at a multitude of things.
How long you lived in your home.
How long have you worked at your job.
Are you single, married, or divorced.
Are you always constantly applying for stuff.
Are you taking your credit cards to their limits,
sometimes over your limits.
All of that stuff will come out with a risk score.
640 is an average Canadian.
Anything above 640 means you're above the average Canadian.
Anything less than 640 now you're below average, right?
So, the bank will look at that and say,
"This client already has below average spending habits,
below average credit habits.
Do we really want to lend to them", right?
And it might not even be the case,
so the fact that you've applied to 10 different places
you might not be a credit seeker
but you weren't given the right advice.
In the beginning, the credit bureau
is gonna think you're a credit seeker.
And it's gonna reduce your credit score by that much,
and now you're gonna come across as a risk to the bank.
Have a detailed conversation with six banks
before you do an application.
Find out what their rates are,
what their terms and conditions are,
narrow it down to one or two that you're comfortable with,
and do it with them,
and it should not affect your credit score.
- Actually if you wanna know more about the credit score
check out our video above and the description below.
So, the question of the day I have for you is,
how was your experience with the entire pre-approval
and approval process and did you actually switch lenders
or did you actually get denied?
Let us know about your experience
in the comment section below.
So, if you wanna know more about
the step by step process of how to get a mortgage approval
check out this video series here.
As well as additional videos on home financing
which you can find here.
Don't forget to subscribe to keep learning from the experts
and I'll see you in the next video.