If you're considering buying a house, you'll likely want to get pre-approved for a mortgage. Pre-approval is when a lender evaluates your financial situation and tells you how much money they're willing to lend you. Getting pre-approved can give you an advantage in the home-buying process; it gives you more buying power by letting you know how much you can borrow with minimal risk.
However, knowing what to do – and not do – during this time is essential. Here are some tips.
What to do to Get Pre-Approved
1. Apply for a mortgage pre-approval first
Most people think that the first thing they need to do when looking for a new home is to contact a real estate agent and start going through open homes. That's not always accurate, though - especially if you want an idea of how much your mortgage will cost or what interest rate may be applicable. The best way around this problem? Apply for pre-approval directly from banks before starting any serious searches.
Being pre-approved saves time later down the line and helps you know how much you can afford to spend before you begin. You can get a reasonable estimate of how much you can afford through a mortgage calculator. However, the hard limit will always be how much the bank will approve you for – a mortgage pre-approval gives you that.
Curious how long it takes to get a mortgage pre-approval? It can be done within an hour if you have your documents ready. Get in touch with a mortgage broker to get started.
2. Shop around for the best pre-approval rate
Just as you will see many homes before finding the right one, you should also shop for the best mortgage rate. Don't just go to your local bank and expect to get a good deal. Do your research and compare mortgage rates, or use a mortgage broker who will negotiate on your behalf.
Even half a percentage point can make a huge difference in your regular payments and the amount of interest you'll pay over time.
Once you receive your mortgage pre-approval, house hunting should begin. You will have 90 - 120 days to accept or reject this offer before it becomes binding on both parties involved in negotiations. It's best to wait until this period to house hunt!
3. Assemble your documentation
Collecting the documentation needed for a mortgage pre-approval and application can be timely and confusing. To begin, ass your mortgage broker what documents are required and gather them in one place.
Here's a typical list to get you started:
Identification: This proves you are who you claim to be.
Bank account and investment statements prove to prospective lenders that you can pay your monthly payments. Please make sure they are accurate.
Proof of assets: Showing your assets, like a car, cottage, or boat, is necessary because it allows lenders to calculate your net worth (how much money you have).
Proof of income: To provide assurance, it can be in pay stubs or a letter from your employer. If you're self-employed, you must have z notice of assessment.
Information about your debt: The information must include student loans, car loans, and credit cards. Lenders have access to databases of this information, so don't think about hiding it.
4. Stay in touch with your broker
Stay reachable if your mortgage broker has any questions about your documentation, meaning avoid vacations or business trips where you won't have access to email or phone. They may make assumptions about your intent and reject your mortgage pre-approval if you aren't available. If you absolutely must leave town, inform your mortgage broker in advance.
5. Read the fine print
Once you've been pre-approved, your loan officer will send through your pre-approval document. This document will outline the interest rate you'll receive, the loan terms, and the mortgage amount you've been pre-approved for. It may seem confusing with financial jargon, but reading the fine print on every page is essential. If you have a family lawyer or accountant, having them look over it is a good idea.
What Not to do to Get Pre-Approved
The path to ruin is paved with good intentions but with silly mistakes. Here are four rules that will help you achieve pre-approval success if you stick to them.
1. Don't get pre-approved over your budget
It would be best if you did not make the upper ceiling of your mortgage pre-approval your maximum purchase price. Instead, do your calculations, figure out how much you can afford monthly (don't forget the other costs associated with homeownership, not just the mortgage) and go from there.
When people become pre-approved for something much more than their budget, they can become tempted to use it to buy a more expensive home, even if they can't afford it.
2. Don't make major purchases
Once you've submitted your documentation to your loan officer, your financial situation shouldn't change from pre-approval to loan finalization. Your situation will change with buying new furniture, vehicles, expensive vacations, or other significant investments.
Changes to your financial situation could ultimately result in loan rejection, even if you were initially pre-approved. Don't make significant purchases that change your debt service ratios to avoid rejection.
3. Don't apply for new credit
In addition to major purchases, please do not consider applying for new forms of credit. Steer clear from a new personal loan or credit card, and don't co-sign a loan for a friend or family member. Your debt level and available credit are factors in mortgage approval, so increasing them may risk your pre-approval.
4. Don't quit or change jobs
What should you do if your job is getting in the way of buying a house? Hold off on changing employers or starting new ventures until after securing that first mortgage. That's because steady income from work will ensure no hiccups when it comes time to apply for financing, so keep this as consistent as possible by sticking with one company throughout all stages!
If the worst should happen, and you are fired or made redundant, it's probably a good idea to delay buying a home until you regain financial stability.
The Bottom Line
You know what they say - plan, and you'll be set for success! When getting pre-approved, it's planning another step in your journey. If this sounds good to you, I recommend taking the time now so that when applying, later on, there won't be anything stopping you from moving into that perfect home with ease.