Welcome back to the show. I'm excited today to tell you about the three types of pre approvals that a lender can do for you, which one is important and which one means practically nothing. Okay. So there's three separate types of preapprovals. The first one is a verbal preapproval.
Scott Dillingham:The second is a preapproval using a mortgage calculator, and the third is a full preapproval. And I'd like to touch on what each one is, what lenders do, what type, and what one that you should go with to make sure you're safe when you're putting in an offer on a home in this hot Windsor market. So the idea behind the show or or what me inspired me to make this episode was that the market is so hot and almost every house there's a bidding war. And to win that bidding war to be competitive, a lot of buyers are wanting to remove that financing condition. And it is a big risk if you haven't got the right pre approval.
Scott Dillingham:So that's, what's super important here is getting the right pre approval. So a lot of people think that they do it. They go to the bank or lender, whoever, and they believe they're getting a preapproval, but a lot of times it's not what they actually are getting. So I'll dive into them. So first we'll speak about a verbal preapproval.
Scott Dillingham:This is the one that I find clients ask me for the most actually, is they wanna sit with me on the phone, run over their scenario and their numbers, and for me to tell them the preapproval. This is the worst one that you could do, and I do not recommend this for anybody that's out there. The reason is there are so many variables. Right? Over the phone, it's hard to calculate the debt ratios.
Scott Dillingham:You can, but a lot of times, customer may not know their exact monthly payments. They may not know, like, for an example, if you owe 10,000 on a credit card, right? We have to say dollars is your minimum payment. Or a lot of times when it's a verbal preapproval over the phone, the client will say what the monthly payments are. So a monthly payment on that might be around $150 owing $10,000 on a credit card, but the lenders require that you use 300.
Scott Dillingham:Right? So there's there's a $150 a month difference, which can have a huge impact on your purchasing power depending on your income. The other thing that's important is we need to know your credit score. A lot of customers, they'll use Borrower, they'll use their online banking app and they'll check their credit. And it's a good starting point to make sure you're on track with your credit score, but it's not a good start for a mortgage preapproval because that score is only from one credit reporting agency where when you get your credit checked for a mortgage, it's a beacon score.
Scott Dillingham:So it's the average of all the credit bureau agencies. So the score that we receive when we check your credit for a mortgage is so much different than your own Equifax or TransUnion score. So you'd need to be very careful. Right? So using Borrower, your online banking app to get your score or even going direct to Equifax and TransUnion and getting your report, it's not accurate at all to determine your credit score as far as lending is concerned.
Scott Dillingham:By quoting your credit score, your potential income, that's the other issue. A lot of people will say, oh, I make $10. I made $10 this month or $5, what whatever it is. And they might be counting one time bonuses or car allowance, or it could be counting even COVID relief money. Lenders don't use all of that.
Scott Dillingham:They can under certain parameters like car allowance. If you've got a two year history, they can use it. Some lenders will even make an exception even if you don't have a two year history, but others don't. There's non taxable benefits. Like some companies will pay a housing allowance for someone, but that is depending how it's set up.
Scott Dillingham:If it's a non taxable benefit, it will not show up on the client's tax returns. So even though it's income for the customer, we cannot use it. So this is why, again, doing a verbal over the phone preapproval, it's not good. It's only a ballpark. And if you do yours over the phone, just take it as a guideline of, you know, where to look at houses, very rough idea of where, what budget price to look at houses, but do not ever take a verbal preapproval over the phone as you're good to go.
Scott Dillingham:I hear so many nightmares where people coming to us to help them out. They've gotten themselves in a really tight jam and they said, oh, I spoke to my lender over the phone and they said I was good to go. So I put in a cash offer and I'm declined. Help me. Again, it's because they're doing the over the phone preapproval.
Scott Dillingham:So you never ever want to do that. Only a guideline just to get you looking in the right price range and also to make sure you think you can find something in that price range because some people's budgets, it doesn't support the house that they want to buy. So then that's a sign that maybe now is not the time to buy, or you've got to add another family member or cosigner to your application to increase it. So it's super important to know the ballpark, but again, you don't want to take that as it means you can put in a cash offer. Now the second type of preapproval is done with a mortgage calculator, oftentimes in office with a lender or it's also called and considered a rate hold preapproval.
Scott Dillingham:So most lenders when you go in for a preapproval, it's actually a rate hold that you're getting if you get a piece of paper. Right? So I'm referring to only if you get a piece of paper from them that says you're approved after this much, here's your rate. It's actually a rate hold. And if you read the document, it said no approval implied.
Scott Dillingham:It's just a rate hold. So it actually says they're just locking in that rate for you. So it has its benefits. And the good thing is that you've went to the lender. You've probably brought in some paperwork, hopefully.
Scott Dillingham:If you have it right, Bill, it's like a verbal preapproval again, because then you're quoting to the lender what your income and expenses are. And again, not all lenders take all income and expenses are calculated differently depending on the lender. Going into a bank with verbal information is still the same thing as doing a verbal over the phone. It really means nothing. So what happens at these lenders, and it's not banks, it's not mortgage brokers, it's everybody combined.
Scott Dillingham:Okay. So I don't want you guys to think I'm picking on one lender or the not. It doesn't matter what lender. If, if you're going in with a verbal for preapproval, the only thing I'm gonna say nine and a half to 10 times out of 10 that they're giving you is a rate hold. So what the rate hold does though is it locks in your rate for between ninety to a hundred and twenty days depending on the lender.
Scott Dillingham:So that guarantees you if the rates go up, you're gonna have that lower rate. So it is a good thing to do the preapproval. Now obviously bringing in your income documents is ideal because the lender will look at that and determine what they can and cannot use And then from that, they'll input that into the preapproval. But more often than not, what happens when you go into the lender and you speak with them is they're doing the verbal, they're inputting it into the calculator and spitting out a preapproval. So these pre approvals, unless you've given income documents upfront, they really do not mean much either.
Scott Dillingham:Okay. They're not worth anything. Truest and safest way, which I'm gonna touch on in a minute, but best way for any borrower, regardless of any lender they're working with, bring in your paperwork. Okay. Let the lender see it.
Scott Dillingham:They will be able to determine what they can or cannot use, which is super important for your protection. Now I do have to take a quick pause, and then when I come back, I'm gonna speak to you about a fully underwritten approval, what that means, and how it protects you. Welcome back. So before the quick pause there, I was speaking about the third and best preapproval type, which is the fully underwritten preapproval. And it's probably the most, I don't want to say the word challenging, but it is the most document intensive for clients because you have to bring in your documents.
Scott Dillingham:So we're talking job letters, pay stubs. It's also best to bring in your past two years t fours, and I'll explain all this in a minute. Or if you're self employed, bring in your past two years t one generals, which is ultimately your tax return. And lastly, if you have income in a corporation, we do have some lenders that will accept that. So it's also good to bring in your business financials, which show your corporate income as well as articles of incorporation, which that just proves the ownership of who owns the corp because they need to make sure they can use that income and that you're an owner and it's there for you to use.
Scott Dillingham:But what a fully underwritten preapproval is, and I'm, I get a lot of clients that are like, oh, there's too much paperwork. I don't want to submit this. And can you just do it without this? And just, I'll tell you my income and stuff like that. Of course we can, but it's not accurate at all.
Scott Dillingham:It is super important in this crazy competitive market to get a fully underwritten preapproval. So what we do is we will get your income documents. So if you're a full time employee and you just work salary, right, a job letter and pay stubs will be absolutely perfect. We can determine your income from there. And the job letter is important because now with COVID, they're gonna call your work before your mortgage closes.
Scott Dillingham:And I don't know a lender that doesn't do this, but they call and they make sure that you still have the job and that you make the money that it says it's on the job letter. So they verify it. Some lenders even hire third party companies to do it like interrogation companies. And they'll check and throw off cues and things just to see if there's any line. So they really look into this.
Scott Dillingham:Okay? It's important that you're not supplying anything falsified in those documents because they will pull your mortgage approval. Okay? So you wanna be accurate. Don't make up these documents and submit the accurate and up to date as well.
Scott Dillingham:It's gotta be within thirty days. Now if you're somebody that you've been at your job for at least two years and you're getting overtime or commission or bonuses, it's best to bring in your past two years. Now commission, depending on your lender, you might have to bring in the t one generals. But if it's everything else, the overtime bonuses, the two years t fours. Cause what we'll do is we'll look at your job letter, but then we'll look at your two year history.
Scott Dillingham:And if your two year history is higher, that's what we'll use instead of your job letter because we'll say that's that's including bonuses and everything. And the lender will take that as long as you're in the same job that that you were up the previous two years. And then if you're on potentially, if you're on commission or you're self employed, they wanna see your past two years t one generals. And you can't really get a preapproval without that, especially if you're self employed or on 100% commission because the lenders, they don't use your gross income. They use the income after your write offs and expenses.
Scott Dillingham:Okay. So it's using that much lower amount. And there are tricks that we can do for people that are self employed. We can gross up the income and different lenders allow certain add backs. So say you wrote off a part of your home because you have a home office that will lower your income on paper, but everybody has to pay for a living expense.
Scott Dillingham:So they'll let us add that back into income. So we erase that expense. They'll allow us to do that as well on cell phones and vehicles. So if you're writing off a cell phone or a vehicle, we can add that back into your income as if you did not write it off, which allows us to use more income. So there's all these tricks that we can do when we see your income documents that you cannot do with a verbal over the phone or with the the rate hold preapproval.
Scott Dillingham:So what we do on our end is we'll check your credit, right? So we'll get your Beacon score, your actual real score that the lenders will use. We have validated all of your income to the maximum and the best of our ability based on obviously the documents supplied. And then this is where it gets really cool is we actually submit it to the lender and the lender, it can take one or two days, depending on the lender that's doing the preapproval. And once it comes back, they do the lenders check, not all lenders, but the ones that we use.
Scott Dillingham:And I know other mortgage agents and brokers and banks can do this as well, but not all of them. Okay. So you need to ask if it can be fully underwritten, but what happens is we send these to the lender, they review everything, and then they approve it based on what's on the application. So you've got your approval upfront. Now we're not allowed to tell you to go in cash and it's fine, no conditions.
Scott Dillingham:So if you do hear that, would be a little skeptical and I would just first make sure if your lender is telling you that, make sure they've done the full preapproval for you because we're really not allowed to say that. However, we'll be able to say, look, you're approved. I don't see any issue with your application. I viewed it. The lender viewed it.
Scott Dillingham:I believe it's safe to do. The risk is on you if you decide to, but here is your approval. So usually the only thing that could happen in that scenario that I've seen, if everything's underwritten and it's reviewed upfront, the only challenge that I see at that point is if the property's really bad, if it's got a crappy foundation, knob and tube wiring, really small property with no basement, those types of things, the lenders don't like near student rental areas. They'll do those, but still it's, they're harder. So at that point you're approved as a person, but maybe the property is not okay.
Scott Dillingham:So you have to look at that as well and determine if the property that you want to go in without any financing condition is in good shape. I did have one. They went to a local credit union. The they went in firm. Now this was their own choice, right?
Scott Dillingham:The credit union didn't say that, but they went in firm and then the property condition was bad. The insurance companies, so CMHC, Genworth, and Kenna get guarantee it's Sage now, but they said, oh, we can't we can't move forward with this property. The client's strong. We're okay with the client, but we cannot move forward with the property. So then he was referred to us, right?
Scott Dillingham:Cause he's out of options at the credit union. And then what we're going to do is we're going to do a construction mortgage for him, improve the property. And then we're going to switch him back to a regular lender, but that it costs him more money because those commercial construction lenders, when the property's in really bad shape, they charge fees to use their lending and higher down payment than what he wanted to do. So it's, and the rates are higher. At the end of the day, he's going to be taken care of.
Scott Dillingham:He's going to be okay. But that's the risk with going in firm. Once you have your fully underwritten approval, it's usually property risk. The other risk is if you don't supply the documents and a person submits the preapproval based on your verbal, you know, what you're telling them. Cause some clients they do push us and they're like, no, we're not sending in any documents.
Scott Dillingham:We just want you to approve this. It does happen. We're not gonna say no, but we heavily advise against it because what happens is when we see the documents and it becomes a live application, we uncover discrepancies which could cause you to be from approved to declined. So you wanna be very careful. However, to protect yourself, you wanna do the fully underwritten approval.
Scott Dillingham:So before you go with your lender, ask them if it gets fully underwritten. If they say no, let me know. I know a guy. We can figure this out for you. But I would encourage you to do that to protect yourself.
Scott Dillingham:Again, it's a little more legwork because you're gonna have to collect the documents, And I know that's a sore point for everybody that applies for mortgages, collecting the documents. I know it's a pain, but if it protects you and your family, also locks in the rates when you're getting approved upfront, then you're good to go. Also with the fully underwritten approvals, you could be declined, right? The lender could decline you, but they'll tell you the reasons, right? So it's from the source.
Scott Dillingham:It's not from the person you're speaking to at the lender. It's from the source, the underwriter. So they're telling you, they'll tell you exactly what you need to do to qualify, where if you're just doing a verbal, someone's going to make suggestions. It's not as accurate as hearing it from the lender because the lender knows the rules best. So I look forward to chatting with you again next time.
Scott Dillingham:Thanks so much for tuning into the show. And if you have any questions or you are looking for a mortgage preapproval, check us out at lendcity.ca. You can apply right online or you can give us a call at (519) 960-0370. Looking forward to chatting.