Obtaining a mortgage pre-approval is a key step in your plan to buy a house.
Let’s say you have decided it is time to buy your first home.
You know about closing costs and some of these important steps you need to take before buying your first home.
Wow! You find the dream home where you would like to spend the rest of your life.
You approach mortgage lenders and none is willing to lend you enough to purchase your dream home.
Yikes! You find out too late that you have fallen in love with a house you can’t afford.
It sucks! Right?
While a mortgage pre-approval is no slam-dunk guarantee that you will be able to close on the house of your dreams, it may prevent a heartbreak.
Let’s clarify what the terms “mortgage pre-qualification” and “mortgage pre-approval” mean.
This is different from mortgage pre-approval. It is an initial step in the mortgage process where you meet with a mortgage broker or advisor and discuss your plan to get a mortgage. The lender will ask for information relating to your income, assets and liabilities. Without requesting hard evidence of your finances or running a credit check, the lender will give you an estimate of how much you may qualify for. There is no commitment on the part of the lender and their assessment may change once they have more information on your financial position and credit history/score.
This is a step ahead of mortgage pre-qualification. Here, the lender is going to ask for documentation relating to your assets, income and liabilities. They will also access your credit records/score after obtaining your consent. Once pre-approved, the lender will determine the maximum amount they are willing to loan you, subject to certain conditions. You will be able to lock-in a mortgage rate against increases for a period of time and the lender may provide you with a written confirmation or pre-approval certificate.
Benefits of obtaining a mortgage pre-approval
1. Saves you time: Having a pre-approval gives you an idea of how much house you can afford and what the potential monthly mortgage payment will be. This will narrow down your search and save time.
2. Lock in mortgage rate: A mortgage pre-approval will lock in mortgage rates anywhere from 90-120 days. This means that if interest rates rise during this period, your lender will honor the lower locked-in rate. If their mortgage rates fall, they will adjust your rates lower accordingly. Essentially, you are hedged against a potential spike in rates for 3 to 4 months.
3. Realtors take you seriously: Real estate agents do not want to waste their time on buyers who are not “finance-ready”. When you have a mortgage pre-approval, realtors will consider you to be a serious buyer and are willing to assist you through the buying process.
4. Sellers are willing to negotiate: A seller may give your purchase offer priority if you have a pre-approval letter or certificate showing that you are likely able to close the deal. They may also be willing to negotiate on price and other terms than they would with a buyer who doesn’t have one.
5. No commitment: Getting a pre-approval is free and doesn’t mean that you are committed to obtaining your mortgage through the lender. There are no financial repercussions or penalties if you choose to go with another lender or even decide to postpone your house purchase plans.
The mortgage pre-approval process
Getting a mortgage pre-approval is a relatively quick process that should take no longer than 1 to 2 days. However, be prepared to provide lots of documentation. My advice to first-time home buyers is to put their finances in order, look over their credit report, lower credit card debt, understand their Gross debt Service (GDS) and Total Debt Service (TDS) ratios and to have an idea of the type of house they want to purchase.
In order to make a determination, the lender will want documentation relating to:
- Your personal information and identification: Photo ID and Social Insurance Number.
- Proof of income: Pay stubs, T4 slip or Notice of Assessment.
- Employment verification: A letter of employment stating your current position, salary, type of employment (temporary or permanent) and length of employment. If self-employed, you may be required to provide additional documents including financial statements for your business.
- Proof of down payment: Recent bank and investment account statements.
- Proof of other assets: Vehicles, property, jewelry, etc.
- Debts and liabilities: Including credit card balances, lines of credit, student loans, car payments, personal loans, liens, spousal or child support, current monthly mortgage or rent obligations.
Additionally, the lender would run a credit check with your consent. Lenders will look at your credit report to determine your credit worthiness. If you are applying with a spouse or partner, they will also be required to provide all the above documentation.
Important things to note
No guarantees: A mortgage pre-approval doesn’t guarantee that the mortgage lender will approve your final mortgage application. Several things can still go wrong. Some things that may cause the lender to change their mind about lending you money include:
Changes in your financial circumstances. These may include:
- You lose your job or change jobs
- Your credit score takes a hit e.g. you miss bill payments on a loan
- You add new debt or credit – obtaining a new credit card, line of credit, new car lease, etc. will jack up your debt to income ratios and may also adversely impact your credit score
- Providing false or partial information about your financial position that becomes evident at closing
- You do not have adequate cash reserves to cover your closing costs
The house doesn’t pass appraisal: This may mean that it has defects or it may be valued at less than what you bargained to pay for it. To avoid problems, you may want to get an appraisal before making an offer or insert appraisal conditions in your purchase offer.
Add a financing condition: When completing your “offer to purchase”, always add financing conditions or clauses that make your purchase subject to the lender approving your mortgage financing. This will protect you from liability should your mortgage application be denied.
Reset your pre-approval: If you don’t find a house you are pleased with within the rate-lock period (90-120 days), you can reset your pre-approval to extend the rate hold if the lender allows it. If your financial situation has changed, the lender may decide to restart the approval process from scratch.
Pre-approval vs. pre-qualification: If the lender is not asking you to submit documents or requesting your consent to run a credit check, what you are getting is probably a pre-qualification. This is not at par with a pre-approval. Confirm with the mortgage advisor what exactly you are getting. You should choose a lender that is willing to review your documents and give you a pre-approval.
There are so many things involved when buying a home. After putting your finances in order, obtain a mortgage pre-approval before getting serious with home hunting. While there are no guarantees, if you keep your financial slate clean and avoid financial indiscretions, you stand a good chance of closing the deal!