In many cases, getting a mortgage pre-approval is almost mandatory, and can make the home-buying process run smoothly. But there are limitations to a pre-approved mortgage, which wise home buyers should keep in mind.

Advantages of pre-approved mortgages

Having pre-approved financing shows the seller that you are serious, and will give you an edge in a competitive bid situation.

If the lender reviews your qualifications in depth, getting a pre-approved mortgage will let you know what prices you can realistically afford. You are also protected from rising mortgage rates for the duration of your pre-approval – usually 90 to 120 days.

However, you must make sure you can afford to live with the mortgage you’ve been offered. The expenses of your prospective home could be higher than expected.

Ensure your qualifications are reviewed

Mortgage advisers may pre-qualify you for a loan, but be aware that this is not a guarantee as the mortgage will be subject to later approval by the lender.

If the lender gives you a pre-approval but does not review your qualifications in depth, you may discover that you do not qualify for a mortgage after all. Ask your mortgage adviser if they are just holding a rate, or actually confirming your qualification.

Only the underwriter can confirm that your provable income, down payment, credit and debt ratios, purchase agreement, and property information meet their criteria for a mortgage.

Appraisals

Appraisals are mandatory for getting a mortgage, but they are obviously not done at the pre-approval stage. If the appraisal reveals defects in the property, your pre-approval may be worthless.

Ensure you put financing conditions in place

Mortgages with a down payment of less than 20 per cent must be insured. And if you are declined by the CMHC at this stage, you could be at risk of losing your deposit and being sued. Financing conditions in the purchase order will protect you.

Pre-approved mortgages and rates

The lender pays the costs for pre-approvals, not you. And only one in six homebuyers actually takes the mortgage they got a pre-approval for. This means most pre-approved mortgages have rates from 0.10 to 0.15 percentage points higher than market rates.

However, if rates rise over the duration of your pre-approval, you will still be financially better off than struggling to find financing after you’ve found your prospective home.

Sources used in researching this article include The Globe and Mail: Should you get pre-approved for a mortgage? Ten things to know