Misunderstanding Mortgage Approval Can Be Costly

A Lender uses a two-step process to approve a mortgage:

First they qualify and approve the buyer based on credit worthiness, employment, income and other criteria);

Second they qualify and approve the property (based on location, condition and purchase price as it relates to value, as well as other factors.

In most cases, the mortgage lender verifies the price paid through a certified property appraisal. The mortgage amount they lend is then based on a percentage of the purchase price or the appraised value, whichever is less.

Sometimes buyers, on being told that they have been approved for the mortgage, interpret this to mean that the mortgage is approved. In their exuberance the buyers assume they can remove their mortgage condition from the offer. Yet the approval has only gone through the first step and is still subject to a property appraisal.

As a practice, a good buyer’s agent will talk to the lender or mortgage broker to confirm whether in fact the mortgage has been approved and whether the condition for mortgage approval can be removed or waived from the purchase agreement.

Why is this verification an important step?

  1. The seller will have either purchased another home or made arrangements to move elsewhere. Buyers and sellers have boxed belongings and have gone through considerable stress, time and expense hiring movers and lawyers to take care of all the legalities.
  2. We want to make sure that the money will be there to close the transaction. Buyers, sellers, lenders, real estate people and lawyers all want the same thing: a successful closing with a happy buyer and a happy seller.
  3. We also want to steer clear of a bank appraisal after the mortgage condition has been removed. An appraisal less than the purchase price will reduce the mortgage amount. The buyer would then have to come up with the additional down payment, something not all buyers are in a position to do.
  4. Everyone wants to avoid legal entanglements.

What if the lender or mortgage broker won’t confirm?

This sometimes happens. We then have to explain that we are not trying to infringe on their obligation under the Privacy Act. We are not looking for financial information. As representatives for the buyer--and as a protective measure--we have a duty to confirm whether the buyer can remove conditions safely, without repercussions. As the lenders are the ones who control the money, we need to hear it from them and preferably in writing with something as simple as a fax or an email.

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