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
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 at signing.
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Next article: How to prepare for the spring market
State of the market
The interesting news is that interest rates are at 0.25%. For those of you who have a mortgage, you may want to refinance. Further good news is that while we weather this crisis, demand is quietly growing so that when this is over, there should be a rally in the real estate market.
People still have to sell, and people still have to buy. For those who are in the market for a second property, their disposable income is growing. The demographic of a secondary home buyer is 40 to 60 years old, with savings in low-risk devices such as GICs and bonds. The income in this demographic should be increasing, which means those looking for country homes will be buying in the coming months.
‘The interesting news is that interest rates are at 0.25%. For those of you who have a mortgage, you may want to refinance.’
I am still working and showing property via Centris pics and virtual tours. Notaries and mortgage brokers are working via Skype and electronic signature.
The OACIQ is preparing a new clause for the promise to purchase that take into account inspection since inspectors are not an essential service and cannot perform their jobs. If offers are made, special delays will be in place. We will get past this and I believe the future will be brighter, cleaner and better.
The COVID-19 virus is very nasty and highly contagious. For the aged or those who have auto-immune deficiencies and become seriously infected, the result is either permanent degrees of lung damage or death. For those who are infected but have mild or no symptoms, they are still carriers and can infect those around them.
Have a great day, make the best of the situation, please stay safe and take precautions.
Joseph Marovitch has worked in the service industry for over 30 years. His first career was working with families from Westmount and surrounding areas, hosting children between the ages of 6 to 16 as the owner and director of Camp Maromac, a sports and arts sleep away summer camp established in 1968. Using the same strengths caring for the families, such as reliability, integrity, honesty and a deep sense of protecting the interests of those he is responsible for, Joseph applies this to his present real estate broker career. Should you have questions please feel free to contact Joseph Marovitch at 514 825-8771, or firstname.lastname@example.org