There are many steps involved in the homebuying process but the most important step is the first one: The mortgage pre-approval. It may sound like a less-than-exciting first step but it’s an essential one. Not getting a mortgage pre-approval could mean the difference between securing the home of your dreams and missing out. I know because this happened to me!
Let’s look at what a mortgage pre-approval is, the benefits and limitations, and why it’s important to get pre-approved before looking at homes.
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A mortgage pre-approval is a process where a mortgage broker (or your lender) will ask you a variety of questions about your financial situation. Using that information, your mortgage broker will pre-approve you for a set purchase amount and mortgage rate that lenders are willing to offer you for your first term.
Once you’re pre-approved, your mortgage broker will guarantee that the mortgage rate will not change for a certain period of time, usually 90 to 120 days. You’re then “locked in” to this interest rate while shopping for a home and if interest rates go up, you’ll still benefit from this low mortgage rate. If interest rates go down, your mortgage broker will negotiate with lenders to secure you a new, lower rate.
Mortgage pre-approval is the first step in the home buying process (even before finding a realtor), which means that as soon as you think you’re ready to buy a home, you should get pre-approved.
Being pre-approved before you choose a realtor means you’ll be prepared to make an offer if you find the home of your dreams. Mortgage pre-approval typically takes a few days, which could be the difference between submitting an offer in time and missing out. Trust me, I’ve been there!
How to get pre-approved
To apply for a pre-approval, contact a mortgage broker. Your mortgage broker will ask you a series of questions about yourself, including questions about your employment as well as current assets and liabilities. Then your mortgage broker, with your permission, will pull your credit score. Based on this information, they’ll pre-approve you for a specific amount.
Benefits and limitations
Your maximum affordability is how much your lender is prepared to lend to you. Your mortgage broker will calculate your maximum affordability based on the information you provide in your pre-approval interview. Factors include:
- the size of your down payment
- your credit score
- your income
- your debt
Once you know how much you can borrow, your realtor can focus your home search on neighbourhoods within your price range.
It’s worth noting that just because your lender pre-approves you for a particular home price doesn’t mean you need to buy at the top of your price range. Do the math and decide what price range makes sense for your finances.
If you do find the home of your dreams and you make an offer to purchase, your pre-approval will sweeten the deal. The seller will know you’re a serious buyer.
But there’s also one big limitation to being pre-approved, which is that your financing isn’t guaranteed.
While a pre-approval is a good first step to securing financing, it doesn’t guarantee that your lender will loan you money. There are several reasons you could be denied a mortgage after being pre-approved, including:
- a change to your financial circumstances, such as a job loss
- flaws in the home itself, such as old electrical wiring that’s not up to code
- the home’s appraised value is well below the purchase price
Because of this, make sure that your offer to purchase is always conditional on financing.
The good thing about receiving mortgage pre-approval is that it’s free and you’re not obligated to purchase a home by the end of the 90- or 120-day period. When the locked-in rate expires, your mortgage broker will renew your pre-approval at today’s best mortgage rates.
The bottom line
Mortgage pre-approval is a powerful tool in the homebuyer’s toolbox so don’t overlook it. You should contact a mortgage broker for a free pre-approval before beginning your home buying journey.
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