Real Estate Talk:
The pre-approval myth

A pre-approval should be a document that indicates the buyer’s ability to pay

By Joseph Marovitch

January 25, 2024

I have always maintained that if a buyer obtains a pre-approval from a financial institution and presents this with a promise to purchase, then half the battle is won. All that should be left is for the bank to send an evaluator to make sure the property is worth what the buyer is paying.

Apparently, this is not the case. I discovered that a pre-approval has all the worth of tissue paper. The truth is anyone can walk into a bank and request a pre-approval for any amount of money without any proof or verification that they have the funds.

The buyer simply tells the mortgage broker they own a house and have a million dollars in the bank and the mortgage broker, based on the buyer’s word, will provide a document that states the buyer has been pre-approved by the financial institution. Stated on the same document is, at the bottom, in small writing, “pending certain conditions”. Any broker, seller, or yahoo on the street can state the same thing on a piece of paper, saying the buyer is pre-approved pending verification.

The truth is anyone can walk into a bank and request a pre-approval for any amount of money without any proof or verification that they have the funds.

The difference is the bank letterhead did provide credibility. The mortgage broker’s pre-approval gives the seller a false feeling of confidence in the buyer’s ability to pay. The seller then accepts the buyer’s promise to purchase. Upon verification and finding out the buyer does not have two nickels to rub together, the seller is disappointed. The broker loses the buyer’s confidence as does the financial institution that produced the not-so-useful piece of paper called a pre-approval.

A pre-approval should be a document that indicates the buyer’s ability to pay by checking their credit score, proof of funds and assets. The only item that should be verified after an offer is accepted should be the value of the property.

A pre-approval should indicate, upon verification, a buyer’s ability to pay, and based on verification, how much a financial institution is prepared to lend. A pre-approval as just described carries weight and shows integrity on the part of the real estate broker, mortgage broker, financial institution and the buyer.

Instead of a pre-approval, it would be better to state the following in a promise to purchase or counter-offer:

“This promise to purchase shall be accompanied by a deposit of $_______ (either with the promise to purchase or within 3 days of an accepted promise to purchase) failing which this promise to purchase shall be deemed null and void.”

‘A pre-approval should indicate, upon verification, a buyer’s ability to pay, and based on verification, how much a financial institution is prepared to lend.’

Note that a deposit must be returned in the event the offer fails unless certain conditions are in default or if all conditions are satisfied and the buyer does not show up at the signing.

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: What are the buyer’s options if the inspection indicates major issues

State of the market

Bank of Canada interest rate: 5 %
Canadian prime rate: 7.2%
Canada inflation today: 3.4 %

Today, the Bank of Canada announced it is maintaining the key interest rate at 5% for the 4th consecutive time. The B of C also stated that there should be no need for further interest rate hikes if the economy continues to slow down with reduced spending by consumers.

What is noticeable is that there was no comment, as previously stated several times in the past, of a need for possible rate hikes. There was a comment that there would be possible rate decreases if the economy continued to weaken. This is very good news for homeowners who will see increased value in their property.

‘The B of C also stated that there should be no need for further interest rate hikes if the economy continues to slow down with reduced spending by consumers… This is very good news for homeowners who will see increased value in their property.’

However, this will also bring more property to the market and more buyers. With more property, there is more competition and more negotiation room for buyers.

Have a great week!

Image: Davis Sanchez from Pexels

Other articles by Joseph Marovitch