Real Estate Talk:
Pre-approval or proof of cash

The importance of having your financing in place when you make an offer to buy

By Joseph Marovitch

Updated September 7, 2023

When purchasing a property, one must either obtain a mortgage or pay cash in full. To save time and avoid financing issues, it is both wise and a must to either provide proof of cash or a pre-approval with a promise to purchase. These items help achieve the best price possible for the buyer and provide an advantage over another buyer who does not have financing in place. Sellers want buyers who can pay.

Proof of cash

This is easy to obtain and necessary if the buyer is paying in cash in full. The buyer simply requests from their financial institution a letter stating they have sufficient funds to purchase the property in question. Another option is to provide a recent bank statement. The letter does not have to state a specific amount of money. With this letter, the seller is much more at ease and confident the sale will go through. This is also a legal requirement if all cash is offered.

To save time and avoid financing issues, it is both wise and a must to either provide proof of cash or a pre-approval with a promise to purchase.

Pre-approval

A pre-approval from a recognized financial institution is an extremely useful tool when searching for a property. In a promise to purchase with a pre-approval, a buyer indicates partial proof of financing. It takes approximately thirty minutes at the bank with a mortgage broker and determines the following:

– How much the bank is willing to lend you
– An interest rate that can be secured for up to 120 days

Note there is a second step to a pre-approval, which is that the bank will want to know if the property being purchased is the same value or higher than the purchase price, via an evaluation. Always check a buyer’s pre-approval for conditions as well. Banks will provide pre-approvals based on verbal information without verification. Therefore, the pre-approval without verification may not be very useful.

The pre-approval provides several advantages including:

A secured interest rate, which ensures that:

– If rates increase, you will still have the lower secured rate.
– If rates decrease, you receive the lower rate.

Buyers are more willing to accept a lower offer from a buyer with a pre-approval than a buyer with a higher offer but no financing in place.

Budget

With the knowledge that the bank is prepared to lend up to a specific amount, the buyer is aware of the budget you must work with, allowing the broker easier negotiation with a seller.

‘Buyers are more willing to accept a lower offer from a buyer with a pre-approval than a buyer with a higher offer but no financing in place.’

Step 1

• Meet with mortgage broker
• Provide social insurance number
• Identification
• Last pay statement, if possible
• Proof of assets
• The mortgage broker checks your credit history and rating.
• The mortgage broker then indicates if they can lend and how much.
• A document called a mortgage pre-approval is provided to the buyer, stating the buyer is approved for a specific amount and at what rate for what period (used in an offer).

Step 2

• Once the offer is accepted, the bank will perform an evaluation to determine that the property the buyer is purchasing has the value stated by the vendor.
• Upon completion of a successful evaluation, the bank will provide a document titled Final Mortgage Approval.

Upon receiving the final mortgage approval, the condition of financing is deemed satisfied.

Should you have questions or comments, please refer to the comments section at the bottom of the page. As well, to view past articles, click here.

Next article: The inspection process

State of the market

CPI today (inflation rate): 3.33%
Bank of Canada interest rate: 5%

There is partially good news. The Bank of Canada had its monthly meeting today, September 6, and decided to leave the current rate at 5% based on the weakening economy. With pressure due to higher interest rates, demand has slowed down. Inflation remains at 3.3%, but economists expect that the consumer price index will reduce and permit a possible decrease in interest rates in 2024.

However, with still too many moving parts in the world there is still the possibility of inflation rising which is why the Bank of Canada is still holding the option for possible rate increases in the future.

‘If more homes enter the market as expected, and rates remain steady or decrease we will see rising values.’

What we may see at this time is rising inventory as mortgages come due. Even with the Bank of Canada rate of 5% remaining steady, new mortgage rates will be at 6% or higher. Currently, inventory is low while carrying costs and rates are higher. If more homes enter the market as expected, and rates remain steady or decrease we will see rising values.

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Other articles by Joseph Marovitch