Pre-Approvals – A Crash Course For Buyers
The process of buying a home can sometimes seem tedious and complex. You have to schedule a time to view houses – yet still go about your daily routine.
However, having a pre-approval for a mortgage can make your work easier.
In fact, it gives you an advantage to home-buyers who are shopping for a home idly.
A pre-approval helps you narrow down to homes within your financial budget. As such, you can run a narrow, focused search – knowing exactly the range you’re looking for.
And when the time comes to make an offer on a home, it will actually be useful as part of the negotiations.
On top of this, you can get professional help, advise and guidance on exactly how much you can afford and what your budget for a home should be.
So there are very good reasons to get a mortgage pre-approval before buying a home.
How Do You Get Pre-Approved for Mortgage?
You have two choices really:
- Talk to your own bank or lender and get pre-approved through them. This does – however – limit your mortgage options.
- Talk to a Mortgage Broker who can – for free – help you get pre-approved and advise you on the real range of options available to you – including dozens of possible lenders.
Both options – and applying for a mortgage in general – are completely free. We recommend our partners at GTA Mortgage Pros if you’re considering using a Mortgage Broker.
The pre-approval process
Once you have submitted your application, it will take some days to get an answer. Some paperwork may be required upfront including:
- Recent financial statements of bank accounts and statements
- Proof of assets such as cars
- Income and employable details if employed
- Debts you owe and other liabilities
- Available funds (eg. down-payment)
The lender/Mortgage Broker will also pull your credit score to see if there are any issues there which would prevent you from getting a mortgage.
Once they are satisfied with the documents you’ve provided they’ll give you a pre-approval commitment letter – which essentially states the maximum amount of mortgage that you can afford – based on your application at the time.
It’s worth noting that the rate at which you will be pre-approved at is – in most cases – not the rate you’ll get for your mortgage – and usually they are much higher.
The reason for this is that a lender doesn’t want to lock in a low rate for you – when you might not be buying for months – so they’ll usually pre-approval you at a higher interest rate than the normal market rates. Don’t be put off by this – it is very normal.
Why Is Getting A Pre-Approval A Good Idea?
We talked a little about this at the beginning but – before we go into more detail – it’s worth pointing out that there is no legal or other requirement for you to have a pre-approval before putting an offer in on a home.
With that said, for the vast majority of people, it makes very good sense to at least talk to a professional about how much you can afford – and check your financials and credit for any issues.
If you are looking forward to being a homeowner in the near future, having a pre-approval for a mortgage can help you get ready and provides several other advantages:
It gives you a competitive bargaining power
A pre-approval assures the home seller that you have the financial capability to purchase the house and pay immediately.
One of the risks to a seller is that someone will ‘re-neg’ on the agreement – by not being able to afford the home, for example. Then they’ll have to go through the whole home selling process again – which is not something people want to do.
As such, sellers take the safest option and a buyer with a pre-approval for a mortgage presents a much safer option to most sellers than one without.
Put another way: if you have an offer on a house that is identical to another buyers – but that other buyer is not pre-approved for a mortgage but you are, it is highly likely the seller will take your offer.
It helps you work within a budget
One of the most important things getting a pre-approval done is that it gives you a clear budget to work with.
House hunting can sometimes be exciting and in the middle of it, you might start viewing houses that are beyond your financial muscle.
The result is a delayed house hunt and often you just wasting your time.
However, when you have a pre-approval, you understand your financial limitations and options much better. As such, you are able to consider homes within your budget and in no time, you will have a home with the least possible time, resources and effort used.
You can get ahead of potential problems
In the process of obtaining a pre-approval for a mortgage, the lender/Mortgage Broker will have to verify some of your information including your credit information.
Any issues will then be identified at this point and you’ll be informed about them.
These problems may deny you a pre-approval – or limit what your budget is to begin with. However, the good news is, you have now identified them and can start to work on getting them fixed or can adjust your home buying strategy accordingly.
We don’t need to spend too much time discussing this one but – other than the time commitment involved – getting a pre-approval doesn’t cost you anything. So you have no excuse.
And if you use a professional to help you, you can even minimize the time commitment.
Pre-Qualification vs. Pre-Approval
A pre-qualification is issued without necessarily having examined and verified your employment, income and credit history.
It is basically an informal pre-approval – and they are quite rare in Canada.
The main use is to help you estimate their working budget. A pre-approval is therefore of much more importance. This is because it is proof that a lender has approved your financial ability to get a specific loan amount.
Can You Be Denied A Pre-Approval?
Yes, an application for pre-approval is not always successful.
There are three responses after applying for a pre-approval
- Pre-approved – this is a successful application.
- Pre-approved with a condition – in this case, you are required to submit further documentation for clarity. In other instances, the lender may require you to pay off some debts to satisfy the conditions for a mortgage.
- Denied outright – in this case, your pre-approval is denied. The lender has to explain to you why you and give you advice on how to improve your financial health as well as your credit status. Providing incorrect information can be the cause of a denied outright response. Applying for too large a mortgage can also lead to this.
If you’re working with a top-rated, professional expert – such as a Mortgage Broker – it is highly unlikely that your pre-approval would get denied.
This is because they know all the lenders and mortgage options out there much better than anyone else – so they should never really let it get to the stage where your application is denied – by only sending it to a lender who they know is likely to approval you.
Misconceptions About A Mortgage Pre-Approval
There are a number of myths about a mortgage pre-approval:
Getting a pre-approval is a guarantee that you can get a mortgage for that amount
Unfortunately, this isn’t true. It is actually possible that your mortgage is denied – even after having a pre-approval for that amount. However it is quite rare.
The reason for this is that the property itself is an important part of the mortgage decision.
Let me give you an extreme example: let’s say you’ve been pre-approved for a mortgage of $750,000. You go out and you find a shed that doesn’t even have a kitchen, bathroom or bedroom and you decide to buy it for $750,000 – after all you’ve been approved for that! Well, you can imagine that the fact you’re approved for this isn’t going to matter – no lender is going to lend you $750,000 for a shed…
Obviously this is an extreme example but the point is important: the property itself will always be a part of the final decision – so a pre-approval doesn’t completely guarantee approval at the end of the day – until the lender knows what the property is.
You can’t get any more than the maximum on the pre-approval
While this may not be a smart move, you can definitely get a mortgage for more than what you’re pre-approved for.
It really depends on the lender and the situation.
Some lenders will approve you for your maximum amount; others will approve you for what you asked for; other lenders can be quite conservative with their mortgage pre-approval.
This is another reason why we recommend having a professional, expert Mortgage Broker on your buying team – they will be the best person to advise you on what the real amount you can afford is.
The Final Say On Pre-Approvals
The importance of a pre-approval for a mortgage cannot be dismissed. It’s like hunting for a new car without any idea what the price of the car is – all those BMWs look really nice, but can you actually afford one?
If you are looking to own a home we strongly recommend (1) that you get a pre-approval and (2) that you work with a Mortgage Broker to help make the process much more easy. In addition to this, a Mortgage Broker can answer any and all mortgage questions you may have along the way – which makes them very valuable.
They are an important step in making the process of purchasing the home of your dreams much more smooth.