Congratulations! Making your first home purchase is a significant achievement and likely the biggest investment you’ll make in your lifetime. But as any homeowner can attest to, the process of buying a home – whether it’s your first or fourth – can be a complex, stressful process. Navigating your financial path to homeownership requires extensive planning and preparation. How large a mortgage will you need? Should you go for a fixed or variable interest rate? Should you consult a bank or a broker? There’s a lot to learn and decide upon before you’ve even started scoping out open houses!
One step that makes the home buying process a little easier is getting pre-approved for a mortgage. Pre-approval can simplify your home search in many ways and give you a better feel for your budget.
Here are some things you need to know about mortgage pre-approval and why you should be considering one if you’re preparing to enter the real estate market.
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What Does it Mean to Get a Mortgage Pre-Approval?
Mortgage pre-approval, sometimes called mortgage prequalification or mortgage preauthorization, determines if you qualify for a mortgage loan from a lender. After reviewing your financial details, a lender will provide you with the maximum mortgage value; this is the maximum amount of money the lender is comfortable lending you.
The mortgage pre-approval typically lays out your regular payments, along with the interest rate for your first mortgage term. The lender only guarantees this interest rate for a predetermined number of days.
You are not obligated to get pre-approved, but it gives you a concrete idea of what price range of home you can afford, helping to narrow down your search.
To get pre-approved, the lender will ask for specific financial information, including your employment status, proof of income, and the value of your assets. Additionally, they will likely run a credit check to review your credit history.
Reasons You Should Get Pre-Approved for Your First Mortgage
There are several benefits to getting pre-approved; here are some of the primary ones:
Knowing What You Can Afford
The most significant benefit of a mortgage pre-approval is getting a feel for what you can realistically afford. Lenders are generally risk-averse. They take an in-depth look at your financial situation and determine a value that will limit their risk, only giving you what they estimate you can comfortably afford. The pre-approval process lays out your mortgage payments for the first term of your mortgage. By adding this payment amount to your monthly budget early, you can get a feel for any lifestyle adjustments to live within your means once you’ve purchased your home.
Hidden Costs
As a first-time homebuyer, the pre-approval process provides an opportunity to talk to lenders about the additional costs that come with buying a home, like legal costs, closing costs, title insurance, and CMHC Mortgage Loan Insurance (if necessary). Budgeting for these costs early will help avoid any financial shock after you’ve committed to a purchase.
Lower Interest Rate
Pre-approval can help ensure you get a lower interest rate. The lender guarantees the rate they provide for a specified term (generally 120-160 days). If the rate goes up, you will maintain the lower rate they offered if you’re still within your term period. Remember that a mortgage pre-approval does not tie you to a lender; if the mortgage rate dips down by the time you’re buying, and you find a lender offering you a better rate, you can always commit to another provider.
Narrow the Search
When you know how much money you can borrow, it ensures that you don’t waste time looking at homes outside of your price range.
Fewer Conditions on Purchase
When the time comes to buy your first home, pre-approval removes a condition from your offer, letting sellers know you are a qualified buyer. Given the fierce competition in today’s housing market, anything that can give you a leg-up over competing offers will bring you closer to your dream home.
You'll Close Faster
When a seller accepts your offer, if you’re already pre-approved, you can close on the offer faster and may even be able to move into your new home earlier.
Where Can You Get a Mortgage Pre-approval?
There are more mortgage providers than ever before, giving you many options as a homebuyer. Take the time to shop around for the best rate. Even just a few tenths of a percentage can translate to thousands of dollars in savings over your term period.
There are two options for getting a mortgage loan: directly from a lender or working with a mortgage broker, and you can get a pre-approval from both.
Mortgage Lenders
Mortgages are available from several types of lenders. Typically, homebuyers choose a bank, credit union, mortgage company, or online entity for their loan. Different lenders may have different interest rates and conditions. Many lenders offer online pre-approval; take advantage of the simplified process to easily compare several rates and the various terms (such as down payment requirements, property insurance, and any other applicable fees) defined by each party.
Mortgage Brokers
Unlike a mortgage lender, a broker does not lend money to you directly, and a broker facilitates the transaction between you and a lender. Since brokers have access to many lenders, they shop around on your behalf, matching you with a reputable provider offering the best rate and terms for your needs.
Be a Smart & Savvy Homebuyer
Opening the door to a home that you’ve worked hard to earn is undoubtedly a great feeling, but the financial undertaking of homeownership is not to be underestimated. On top of your mortgage, many other expenses will squeeze your budget as a homeowner, including property taxes, utility bills, and inevitable repair and maintenance costs.
Mortgage pre-approval is an essential first step in budgeting as a first-time buyer. It helps you prepare for some surprise costs adequately and makes you confident that you’re purchasing a home within your means. Applying for a mortgage pre-approval is a free service with enormous benefits, so take advantage of it.
Happy house hunting!
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