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While it’s not mandatory to have mortgage pre-approval from a lender before buying a home, obtaining it does offer several advantages. Pre-approval doesn’t mean you’re guaranteed to be approved for a mortgage once you find the house you want, but it is definitely a step in the right direction. The process offers both buyer and seller a certain level of comfort that the sale will proceed smoothly.
Pre-qualification is a simple process that helps you determine how much you can afford to borrow to buy a house; the amount is calculated from your financial details, such as current income, expenses, assets and debts. No fee is charged for pre-qualification, and most lenders have simple online systems to provide an estimated figure and get you started with looking for the right mortgage provider.
Check out these handy mortgage calculators from a local credit union.
Pre-qualification is often confused with pre-approval, but there is certainly a difference. Pre-qualification lets you know what price range you should be looking at when you’re in the market to buy a house. For a lender, it’s a tentative assessment of what amount you might be eligible to borrow.
Gaining mortgage pre-approval is more involved than pre-qualification and represents a major step forward in the process of buying a house. The application form asks detailed questions about employment, income, assets, liabilities and down payment, and the lender will request permission to obtain a credit bureau report. You will also need to supply documents that confirm your employment and your down payment. Before you apply, you’ll discuss specific information with the lender about your finances and what you can afford in a house–along with mortgage options, such as fixed vs. variable rate, interest terms, payment options and amortization.
Pre-approval is issued with a commitment certificate or letter that is granted for a certain period of time–usually 60, 90 or 120 days–subject to certain conditions. The lender may offer the option of resetting the pre-approval term if it expires before you can find a house or close a negotiation. Many lenders will also lock in an interest rate for the pre-approval period, protecting you from rising interest rates while you’re looking for a house. You’re not under any obligation to follow through on a mortgage with the lender when you’re pre-approved, but it doesn’t guarantee you’ll be approved for a mortgage, either.
Once you find a house, you should know it is mandatory to submit an appraisal to the lender before a mortgage will be approved. Mortgages are applied for once the buyer and seller have signed an agreement to purchase. One of the conditions of your offer to purchase should state “conditional on financing,” since financing depends on the appraisal.
Advantages of Mortgage Pre-Approval
A pre-approval lets you know the type of house you can afford, so you can focus your search and avoid being disappointed. You’ll also have a fuller grasp of what your monthly payments will be, and when interest rates are locked in, you’re protected against sudden increases in interest. When presented with pre-approval, sellers know that a lender has confirmed you’re in a financial position to buy the house. That helps when you’re in negotiations with a seller, especially in a competitive situation. In fact, a poll by Scotiabank found that the majority – 61 percent – of sellers look for buyers with pre-approval, while 69 percent of buyers have pre-approval in hand before they begin their search. In total, 83 percent of respondents felt pre-approvals were more “enticing” for sellers and improved buyers’ position in negotiations.
Even though pre-approval doesn’t guarantee you’ll be approved for the mortgage, the fact that your financial situation has already been verified helps expedite the process, as long as you’ve continued to maintain good credit and stable employment in that period. At this point, the main issue should be the value of the property.
If you want to learn more about the entire process of buying a home, download the Tru Real Estate Team complete guide to buying a home.