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Understanding The Mortgage Pre-Approval Process

Understanding The Mortgage Pre-Approval Process

Did you know that one of the biggest mistakes homebuyers make is looking at rates or making offers without first securing a mortgage pre-approval? This step is essential for understanding how much you can qualify for when it comes to a mortgage and ensures a smooth home buying experience, yet it is often overlooked. If you’re a first time home buyer, or you’re looking to upgrade to a larger home, having a pre-approval will make your house hunt much easier. In this article, you’ll find everything you need to know about getting pre-approved for a mortgage, the difference between approval and qualification, and why it’s such an important part of the home buying journey. 

What Is a Mortgage Pre-Approval?

A mortgage pre-approval is a thorough evaluation of your financial details. By getting pre-approved, you can lock in a mortgage rate for up to 120 days without affecting your credit score.

Having a mortgage pre-approval can be very helpful during the homebuying process. It shows that a lender has reviewed and approved your mortgage application based on the information you provided, subject to certain conditions. This often includes details like the terms, interest rate, and loan amount. While not required, a pre-approval gives you a clearer idea of what you can afford when buying a home.

What Is a Mortgage Pre-Qualification?

A mortgage pre-qualification is a basic financial check based on the information you give to the lender. They just need to verify your address, identity, and income. This verification is usually quite relaxed and can differ from one lender to another.

Since it’s just an assessment, the mortgage expert will ask about your financial situation, including savings, down payment, and debts, to make sure it matches your job and age.

Many smaller lenders don’t offer pre-approvals because they have limited funds. Instead of reserving a rate for someone who might not come back to follow through, they use those funds to give mortgages to existing clients instead of holding them for the tire kickers. These lenders, often not the big banks, prefer to keep their best rates for actual applications with accepted offers and may offer a pre-qualification instead of a pre-approval for a mortgage.

Pre-approval Vs Pre-qualification – What’s The Difference?

Pre-approvals and pre-qualifications are both steps you take before making an offer on a house but, are very different. The main difference is that a pre-qualification doesn’t lock in a rate for you, while a pre-approval does. Some lenders and brokers might use these terms differently, but both aim to evaluate your ability to afford a mortgage.

Pre-qualification is simpler and based on the information you provide, while pre-approval requires more detailed documentation. Pre-approval is almost like getting the final approval, except it doesn’t include property-specific documents or your solicitor’s contact info.

Both steps are usually done before you start making offers on homes. Neither guarantees you’ll get a mortgage since the property itself will also need to be evaluated to ensure it meets the lender’s criteria though a pre-approval is much more likely to be finalized.

The final mortgage approval happens after your offer on a home is accepted. At that point, a mortgage broker can help you with the final details, including solidifying closing costs and submitting all the required documents to your lender. Your final mortgage approval depends on your financial information, the documents you provide, and the condition of the home you want to buy. Even though a lender might have pre-approved you, if something is off in the details you submit they can still deny your mortgage application.

Where Can You Get Pre-Approved for a Mortgage?

Your first option to get a mortgage pre-approval is by going directly to a lender. This could be a bank, a mortgage finance company (MFC), a mortgage investment corporation (MIC), or an alternative/private lender (sometimes called subprime lenders).

Another option is to go through a mortgage broker, like myself, who specializes in mortgage financing. Mortgage brokers work with multiple lenders to find the best deal for you when it comes to mortgage rates and options. And, working with a mortgage broker is free. The broker is paid by the lender when the mortgage closes.

What Information Will You Get From A Mortgage Pre-Approval?

A mortgage pre-approval provides you with personalized details if you’re serious about buying a home. With a pre-approval, you’ll know the maximum amount a lender is willing to finance in regard to your mortgage, which helps you understand what you can afford unless you can increase your down payment. You’ll also see the mortgage interest rate you’re offered and your projected monthly mortgage payment, allowing you to determine if the maximum loan amount fits your budget or if you should aim for a lower limit. Additionally, mortgage lenders often lock in the mortgage rate they offer for 60 to 130 days. This means that if you make an offer on a home within that period and interest rates go up, your rate won’t increase. If rates go down, you’ll benefit from the lower rate. But, if the lock-in period expires you’ll be offered a new rate based on current market rates at that point in time.

You’ve Submitted Your Documents And Information, Now What?

When you apply for a mortgage pre-approval, the lender will do a hard credit check, which can temporarily lower your credit score by a few points. This is why it’s important to make sure your credit is in good shape before you apply. If you’re planning to get pre-approvals from several lenders, try to do them all around the same time. Multiple inquiries within a short period (usually 14 to 45 days) typically count as a single hard check. Another bonus of working with a mortgage broker is that they only run the check once and can then submit that info to multiple lenders if needed so it has less of an impact on your credit score.

After you apply for a mortgage pre-approval, it usually takes about 24 to 48 hours to get an answer, though it can sometimes take a week or more. It’s best to get pre-approved before making an offer on a house so try not to be too impatient. If a seller accepts your offer but you can’t secure financing, you’ll still be obligated to complete the sale which can you get into a bit of trouble financially. And, whatever you are pre-approved, it’s a specific amount so stick to it during the bidding process to avoid legal and financial hot water.

Mortgage Pre-Approval Tips

  1. Find the Best Rate: Shop around for different lenders and rates to find a mortgage that works for you. Consider factors like your down payment, loan term, and whether you want a fixed or variable interest rate, as these will affect your monthly payments. Working with a mortgage broker will make this step simpler and offer more alternatives.
  2. Stick to a Conservative Budget: Don’t feel obligated to buy a home at the maximum amount you’re pre-approved for. Remember to budget for closing costs, moving expenses, and any repairs or maintenance your new home might need. Planning for unexpected expenses like legal advice or a home inspection is always a good idea.
  3. Understand Appraisals: The price you agree to pay for a home isn’t always its final value. Lenders will check to make sure the price is fair, and if they’re not satisfied, they may require an appraisal. If the appraisal is lower than your offer, it could affect how much the lender will finance.
  4. Plan for the Long Term: Owning a home isn’t just about making mortgage payments. Make sure your budget allows for other expenses and long-term financial goals. Save money for repairs and maintenance to avoid being caught off guard by unexpected costs like a leaky roof, a new furnace, or a special assessment from your condo board.
  5. Avoid Major Financial Changes: Don’t make big purchases, change jobs, or take on new debt before getting final approval for your mortgage. Even after pre-approval, significant financial changes can reduce your chances of getting the mortgage.

What if Your Mortgage Is Not Approved?

The mortgage approval process is thorough because lenders need to ensure you can repay the amount they’re loaning to you and assess the risk of you not paying it back. Rejection can be disappointing, especially if you’ve found your dream home. But it’s not the end. If you’re rejected, the first step is to figure out why you were rejected. Lenders have specific requirements like credit scores and stable income. Once you know what they didn’t like about your application you can address those issues.

If your income isn’t enough, consider adding a guarantor or co-signer to reduce risk and work with a mortgage broker to explore other lenders with different criteria. Your credit score is important, and you could improve it by paying debts and avoiding new credit then reapplying in a few months. You’ll also want to fix any errors on your credit report. It takes time, but it’s worth it. Buying a home is an achievable goal if you work for it.

If You Want To Buy A Home And You’re Looking For A Mortgage Pre-Approval, Contact Me. I Can Help.

Getting pre-approved or pre-qualified for a mortgage is crucial when you’re buying a home. Having these mortgage assessments in hand when shopping for a new home can make you more attractive to sellers and increase the likelihood of your offer being accepted.

Are you ready to get started and take the first step toward home ownership? Check out the mortgage calculator on my website and give me a call at 705-315-0516, or book a consultation online. Let’s get you pre-approved today so you can start your house hunt ASAP.

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