How Your Mortgage Pre-approval Can Help You Win a Bidding War

Jordann Brown
by Jordann Brown June 18, 2016 / No Comments

Bidding wars are becoming more and more common in hot housing markets, and buyers have to get creative to come out on top. As the average price for a single-detached house in Toronto and Vancouver continues to climb, buyers are removing conditions and bidding over the asking price to get an edge on their competition.

But there’s another important step you can take to help your chances of winning a bidding war: Using a mortgage approval calculator to find out how much you can afford and then getting a mortgage pre-approval.

A mortgage pre-approval is the process of contacting your lender or mortgage broker, who’ll analyze your financial information and pre-approve you for a specific mortgage amount and interest rate. Receiving a mortgage pre-approval signals to sellers that you’re serious about buying and it could be the difference between winning and losing a bidding war.

Once you’ve been pre-approved, you can lock in your interest rate for about 90 to 120 days. If mortgage rates go up during that time, you’ll qualify for the locked-in rate. If mortgage rates go down, your mortgage broker will negotiate a lower rate on your behalf. When you apply for a mortgage pre-approval, you’re not obligated to obtain a mortgage through that lender but you still find out the mortgage amount you’ll qualify for and the interest rate available to you.

There’s no downside to trying to get pre-approved. In fact, receiving a mortgage pre-approval will help you if you find yourself putting an offer on a home that already has multiple offers.

Commonly known as a bidding war, a multiple offer situation is when a home is listed and the real estate agent schedules an offer date. Before the offer date, potential buyers look at the home and prepare their offers. All offers are then submitted at the same time and the best offer wins.

Bidding wars work differently from a regular home purchase in two significant ways. First, there’s less opportunity for negotiation. Instead, buyers must put their best offer forward first because if it isn’t good enough, the seller may go with another offer.

The second difference between a bidding war and a standard home purchase is that in bidding wars homes often sell for more than the asking price. In some cases, the seller will list the home for less than market value to stimulate multiple offers.

Participating in a bidding war can be stressful and your realtor will advise you to put forward a strong offer to improve your chances of succeeding.

Putting forward a substantial offer usually includes:

  • Offering more than the asking price
  • Eliminating conditions from your offer like financing or a home inspection
  • Having your mortgage pre-approval in place

Here’s how being pre-approved for a mortgage can help you win a bidding war:

Pre-approval determines your maximum budget

If you want to win a bidding war, you should make the most competitive offer you can afford. Being pre-approved for a mortgage will help you figure out exactly what your maximum purchase price is, and you can use that to make a competitive offer.

For example, let’s say you’re pre-approved for a mortgage of $500,000. You’ve saved $55,000 for a down payment, giving you a total budget of $555,000. You want to purchase a home listed for $525,000 and there’s an offer date scheduled. Since you’ve been approved, you can feel comfortable offering above the asking price. But you also know that you can’t go too far over the asking price.

Pre-approval saves time during the viewing process

When you’re applying for a mortgage pre-approval, provide your mortgage broker with as much information as possible ahead of time. That way you’ll have all of the major documentation requirements out of the way and you won’t have to spend time gathering information and documents when you find the home of your dreams.

Instead, you can use that time to view the home multiple times to be certain you’ve found the right home. Taking your time to consider purchasing a home is of particular importance in the high-pressure environment of a bidding war, which can tempt you to gloss over potential problem areas in a home.

Pre-approval shows the buyer you’re serious

Most importantly, nothing says you’re a serious buyer like an offer that’s above the list price, is free of conditions and has pre-approved financing. A seller may choose your offer over a higher offer if they know you’re already pre-approved because it means you’ve done your homework, and the home sale is likely to go through smoothly.

Bidding wars are stressful and commonplace, especially in hot housing markets like Toronto and Vancouver. Even the suburban towns and municipalities surrounding these urban centres are seeing an increase in bidding wars. To successfully navigate a bidding war, you need to move decisively and pull out all of the stops, and a mortgage pre-approval could be the difference between winning and losing.

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Flickr: Jason Baker