So you’ve done some thinking and it looks like you’re ready to buy a home. You’re tired of paying rent into someone else’s pocket and you’d much rather own your own place and build some equity while you’re at it. You’ve decided on the type and size of home you’ll need, maybe a backyard for the dog to run, a garage to store your toys, and hopefully close to work so you won’t have a long commute every morning. Sounds exciting, and it should be! Owning your own home is a goal that many Canadians have. But before we get too far ahead of ourselves there is one step that many buyers forget to consider before they start viewing properties – getting a mortgage pre-approval.
What Is A Mortgage Pre-Approval
Put simply, a mortgage pre-approval is confirmation from a mortgage broker or lender that you are approved for a mortgage up to a certain amount. The lender or mortgage broker will ask for documentation from you, including proof of income, as well as ask about your debts and obligations. They will then run a credit check and determine what your spending limit will be. They can also lock you in at current interest rates, up to a certain deadline, so that if the mortgage rates go up you will still get the lower rate. A “mortgage pre-qualification” is not to be confused with a mortgage pre-approval. A pre-qualification only confirms that you can get a mortgage but does not confirm income or provide a loan amount and does not hold much weight. The more thorough the pre-approval, in terms of providing documents and proof of income, the better the chance you will not have any hiccups later on in your real estate transaction.
Oftentimes, buyers will want to jump the gun and start looking at homes before they know if they could even qualify for a loan, let alone how much they can afford. Buying a home is an exciting time and you’re eager to see what’s on the market and get a feel for each neighbourhood so I can see how it’s easy to forget the boring paperwork sometimes. Sitting down and running financials is way less exciting as browsing and imagining yourself in your dream home. But it needs to be done sooner or later so we might as well get a head start on that.
Aside from it being the recommended first step in any mortgaged real estate transaction, there are many benefits to getting a mortgage pre-approval.
Here are five advantages of getting your pre-approval before starting to look at homes…
1. Know Your Limits
Yes, it’s fun to jump in head first and start looking at homes but it also seems a bit backwards to find your dream home and then work out the budget after. In most cases it makes more sense to figure out what the budget is and then find the best home to fit the budget. When you know your spending limit you can start working on your list of needs and wants and begin weeding out the things that are not necessary. On top of that, if you start viewing homes in a higher price range just to find out you only qualify for a loan of a lower amount you might be underwhelmed with the lower priced properties because you had the bar set too high to begin with
2. Better Leverage In Negotiations
Having a pre-approval shows sellers you are serious about buying a home and gives them confidence that you can actually close the deal. Most sellers will actually be reluctant to accept an offer without a pre-approval, especially in a seller’s market where you could very well be facing multiple offers. Having a pre-approval is just one less thing everybody has to worry about and makes your offer that much more attractive.
3. Narrow Down Your Search
Ok great, so we know what your budget is. Now we can better decide which style of home suits your needs, whether that’s a condo, townhome, or a single family home. And we can start going through your must-haves and would-likes. When you have a specific number to work with you can start checking off boxes with confidence, knowing that you are not being overzealous and knocking things off the list that you may not really need.
4. Lock In Your Rate
Probably one of the biggest advantages of getting a pre-approval, at least financially, is that you can lock in the current interest rate as of the date of the pre-approval. If you don’t buy a house for a few months and the interest rates go up you can still rely on getting the previous lower interest rate. Even better, if the rates go down you will then get the new lower rate. Usually lenders will lock in your rate for 90-120 days, which gives you plenty of time.
5. Quick, No-Hassle Financing Period During The Sale Process
If you don’t meet your financing approval condition before the deadline in your Contract of Purchase and Sale then the deal may fall flat and you could miss out on your dream home. The seller is not obligated to give you more time to finalize your financing than what was originally agreed upon. If another offer comes along and the seller thinks it’s more attractive they could legally void your contract and accept the other one. That’s why it’s so important to have all the paperwork done and submitted before making any offers. If the lender has all the documents on file they can give you a quick turnaround on the final approval and you won’t have to worry about trying to re-negotiate your offer to extend the financing deadline.
As mentioned above, all the same paperwork that needs to be done during a pre-approval would need to be done during the sale process if it wasn’t done already, which could run the risk of the financing period running past the deadline and putting the sale in jeopardy. Since it’s something you’re going to have to do at some point during the sale, it’s best to get a head start on it, have it all done and out of the way so you can focus on having fun viewing homes.
If you don’t know where to start with a mortgage pre-approval, please reach out to us and we can provide a list of great lenders and mortgage brokers.