I was pre-approved but the financing was declined. How can this happen?

Buyers think that even though they have a pre-approval in hand, their financing is guaranteed. Sadly, this sometimes is not the case. It does not automatically mean that your mortgage approval is guaranteed.

When shopping for a home to buy, you must be careful that during that time period you make no changes to your financial situation, your credit score or you employment status or you run the risk of having your financing declined. Download a copy of our report What Not To Do When Buying A Home

When you are pre-approved for a mortgage, the lender bases their review on your financial situation and your creditworthiness. Although they will perform a credit check, all the other details provided to them such as your income, your current debts and past history are what you share with your lender. At the pre-approval state, this information is not verified by the lender and more importantly without knowing what property you are buying the lender cannot make a guaranteed approval. It is all very preliminary.

So, a pre-approval is not binding until the lender verifies all the information. They also review the details on the property you are purchasing and will most likely require both an appraisal and a property inspection to ensure that the lender is willing to take on the risk.

Getting a pre-approval is a great tool to fully understand how much you qualify for based upon the info you provide the lender. Keep in mind however that not all lenders will provide a pre-approval.

Oftentimes, this pre-approval can be done on line so it is super convenient, however, some pre-approvals can come at a cost, sometimes adding anywhere from 15 to 25 bps to your rate. Lenders that offer pre-approvals are hedging their offers and must honour the rate they quote if they go forward with funding the mortgage. This can result in potentially higher funding costs, which is why many rates with pre-approvals are priced at a slight premium. It is best to seek out a professional mortgage broker for advice as to whether or not this is a good idea for your situation. 

The great thing about a pre-approval is that it gives you peace of mind while house hunting and you will have stronger negotiating power knowing that you are working within your budget and what you qualify for.  

The other great feature is that you can lock in an interest rate and this is especially good if you are concerned about mortgage rates rising which you are shopping for a property. Typically, lenders will lock in a rate for 60 – 90 days. 

When getting pre-approved, ask your broker or lender the following:

• How long they guarantee the pre-approved rate
• If you will automatically get the lowest rate if interest rates go down while you’re pre-approved
• If the pre-approval can be extended
• Ask your lender or broker about anything you don’t understand

Should you get a pre-approval? The answer is yes, but keep in mind it is only good if the information you provide the lender is accurate and your situation does not change prior to finding your dream home.

Source: https://www.canada.ca/en/financial-consumer-agency/services/mortgages/preapproval-qualify-mortgage.html