An essential step in the buying process, being pre-approved for a mortgage puts you in a powerful position, allowing you to commit to your offer and set an accurate budget while house hunting. It puts you at an advantage over those other buyers who are only pre-qualified, so here’s what you need to know.
What is it?
A pre-approval is the agreement between you and your lender that verifies that they’ll provide you with a mortgage for a certain amount should you find a house you want to buy. It lays out the pertinent details, such as the interest rate and any other conditions they may have. These approvals are usually only valid for a period of 45 to 90 days. If you don’t find a home within this time period, you’ll have to reapply.
What are the benefits?
Not only does a pre-approval put you at an advantage when compared to buyers without one, it also protects you from any potential disappointment or future financial issues. Sure, you could just look for a home first and then apply for the mortgage, but if you find your dream home and put in an offer only to then qualify for a mortgage that’s less than what you offered, you’ll be in a very rough financial position that could end in legal action when you can’t honour your offer.
How do I become pre-approved?
The first step is filling out a mortgage application form with the lender you would like to borrow from. It will require the following: proof of income, proof of assets, verification of your employment, assessment of your credit report and score, your ID and SIN, and other documentation depending on the lender. After assessing your financial situation fully, they’ll provide you with a document that lays out if you’ve been approved or not, and all the pertinent details in terms of the amount you’re approved for.
What can affect it?
Obviously, your credit score is hugely important here. The higher it is and the cleaner your credit report, the better. If you have a low credit score, it may be harder for you to get pre-approved for a mortgage. The key to a good credit score is always paying bills in full on time and maintaining a low credit utilization percentage, meaning having access to a large amount of credit, but rarely using the full amount.