Looking for your first home or condo, well as you navigate the residential-buying process, it’s important to understand the steps as well as the terms used by mortgage lenders, which are very likely to include the terms pre-qualification and pre-approval. They do sound the same but mean very different things and you should know the difference before heading out to those open houses this Sunday.
This is usually a quick and simple process. You provide a mortgage lender personal financial information, you know the basic stuff such as your income, any debts and assets. Then based on your information the lender will give you a tentative assessment on the amount they would be willing to lend you to purchase your new home or condo, or any other residence for that matter. The pre-qualification process can usually be done over the phone or online with your selected lending institution and there is often no cost or fees for this process. But it is important to remember that a pre-qualification is not a guaranteed loan, it is only the amount to which the bank would be willing to lend towards the purchase should you be approved. Most lenders offer this service so the buyer can get a personalized calculation of the purchase price you may be able to afford based on your debt ratio and your personal credit rating, these again only take a few minutes and the process will not affect your credit score.
This is a more significant milestone in the residence ownership process because a lender is actually checking your credit and verifying your financial information. If you’re pre-approved, a lender is making an actual commitment (subject to conditions such as a property valuation) to loan you money to purchase the property.
A pre-approval is not necessarily a guarantee that you will receive a specific rate or mortgage from that lender because circumstances may change from the time you get-preapproved until the time you’re ready to make a purchase.
How pre-approval works
Getting a mortgage pre-approval means you are preparing to take the next step in the property-buying process. We would recommend working with a mortgage broker or specialist to help guide you through the pre-approval process and get the right mortgage at the right rate for you. There are many different kinds of mortgages, and each can have both positives and negatives so know what you are getting into and what best suites your needs.
Once you have selected one, a mortgage broker or specialist that is:
- You and your mortgage specialist will discuss your financial strategy and needs, mortgage amount, down payment, purchase price, etc.
- You’ll learn about the various available mortgage options (fixed vs. variable rate, interest terms, payment options, amortization, etc.) and discuss which of them best suit your needs.
- With your consent, your mortgage broker or specialist will take an application, which will require you to provide details on such items as employment, income, assets, down payment (if applicable) and liabilities.
- You’ll give the lender permission to obtain a credit bureau report.
- Your mortgage specialist will advise you about the documentation (income confirmation, down payment confirmation, etc.) you’ll need to supply upon conditional approval of your mortgage. Any conditions must be met for your mortgage to be fully approved.
Pre-approvals are subject to your continued good credit and are usually good for 60, 90 or 120 days depending on the lender.
Why get pre-approved?
- You’ll save time house-hunting, seeing only homes you can afford.
- You’ll have a better idea of your monthly payment amounts, as well as how much your down payment will be.
- Real estate agents may serve you better because they know you’re serious and ready to buy.
- When you make an offer to purchase, the seller may be more likely to give it serious consideration because you have solid financial backing.
- Your pre-approved status may give you more negotiating power with a seller.
- Some lenders may give you a rate lock, so you don’t have to worry about rising interest rates while you look for a new home.
- There’s no cost to you and you’re not obligated to accept the mortgage.
Get your financial paperwork in order
You are under no obligation by getting pre-approved, but you want to be comfortable with the amount and terms of your pre-approved mortgage. That’s why it’s essential that you review all your personal expenses and have a good idea of your future expenses before you talk with a mortgage broker or lender about pre-approval. Learn more about knowing how much you can afford.
Remember to Consult a mortgage specialist or broker with questions on the pre-approval process and to get the right mortgage for your needs.
by Jamie Barrie