Should preapprovals be made illegal? Elan Weintraub thinks so.
The Mortgage Outlet broker and director says that there’s no weight behind actual preapprovals, and that they only serve to confuse consumers.
“The word ‘preapproval,’ as anyone who has experience in the mortgage industry knows, has no weight behind it, and it creates misinformation for buyers and for realtors,” he told MortgageBrokerNews.ca. “That misinformation can have dire consequences. There are some lenders who advertise prequalification in 30 seconds, but that cements in buyers’ minds that they could buy a house for, say, $800,000 and then find out they can’t buy it or that it isn’t as simple as they thought it was. Preapproval can fail due to income, down payment, due to the property—it could fail for a lot of reasons.”
Weintraub wrote an impassioned blog post on Mortgage Outlet’s website in which he explains that preapprovals are nothing more than interest rate holds, and that simply changing the terminology can go a long way towards preventing buyer mishaps. He recommends the term “Simple Rate Hold.”
“Calling it a rate hold would clarify what it is: An initial pact, but not an approval.”
Weintraub also takes umbrage with commitment letters for much the same reason, and he’d rather call it a “Conditional Commitment Letter.”
“Because that commitment is subject to up to 10 conditions, including appraisal of the property, value and condition perspectives. If a house has mould growing in the basement, the right price doesn’t matter because a lender won’t want to lend on a house with mould in it.”
To avoid problems with preapprovals, Weintraub recommends ensuring all documents have been properly reviewed by a qualified mortgage professional, not a part-time “order taker.” All other financial obligations, like owning another home or readying to lease a car, also need to be disclosed.
“They will find out and then your mortgage could be revoked!” he wrote. “Second, be aware of the limitations of preapprovals. It is not a guarantee at all, so do your due diligence. Finally, where possible, make the offer condition on financing. A condition on financing was impossible in the spring market [of 2017], but sellers are much more willing to accept a condition in the slower market today.”