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 January 25, 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 to a buyer 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 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: Inspection process

State of the market

CPI today (inflation rate) 6.32%
Bank of Canada interest rate 4.5%%

Today the bank of Canada raised interest rates another quarter of a point to 4.5%. The bank of Canada governor, Tiff Macklem, stated that this may be the last rate hike, however, made no promises as his target for inflation is still 2% from the current 6.32%. If one had a crystal ball, it is very likely one would see more rate hikes in the future, just too many moving parts.

Real estate prices continue to fall, and the latest rate hike will not stall the price decline. There are however deals to be had if the offer is all cash. Rate hikes are having an effect on inflation. In the long term, say two to three years, prices should slowly rise on the island of Montreal and then increase rapidly.

‘Real estate prices continue to fall, and the latest rate hike will not stall the price decline. There are deals to be had if the offer is all cash.’

Despite high interest rates and inflation, there are some locations outside the city where prices have risen due to low inventory and high demand.

If sellers are considering selling in areas such as Saint-Lazare, Hudson, Boisbriand, Sainte-Thérèse, Blainville, Deux-Montagnes, or other suburbs more in the countryside, demand is high and prices are higher, which is the opposite of the island of Montreal. There is a demand for space and peace instead of the busy hustle and bustle of the city.

Have a great week and stay safe!

Let’s not forget that people with cancer are vulnerable too!

You are invited to keep giving to the following organizations since it’s now more important than ever to support cancer research! Click on the logos below to find out how:

Image: pxhere

Other articles by Joseph Marovitch