If you’re excited to buy a new home, pausing to complete the pre-approval process might feel like a drag. It’s much more fun to start looking at homes and imagining your future possibilities. But a pre-approval sets you up for success and helps you plan ahead. In a competitive market, it’s especially important to be well prepared when starting your homebuying journey. Before you start making offers, pre-approval shows that you have the resources to get the home you want. Here’s why it matters.
Mortgage pre-approval vs pre-qualification
Know what you can afford and understand the difference between pre-approval vs. pre-qualification.
Pre-qualification generally takes place before pre-approval does and offers an estimate instead of a guaranteed rate. Getting pre-qualified can help you get a sense of what you might be able to afford before you start your home search. Pre-qualification uses self-reported financial data like income, debts, and assets to make an assessment. Pre-qualification is a great step for those early in the homebuying process and can be a useful planning tool.
The mortgage pre-approval process happens when you’re ready to start your search and meet with an agent. Pre-approval uses verifiable data like income, debts, credit scores, or other financial statements to produce a specific offer based on this data. A pre-approval offers lenders security so they can confidently loan you the money you need to buy your home. Most pre-approval offers are good for 60-120 days, so homebuyers often take this step right before they start touring homes.
Why should I get a mortgage pre-approval?
Pre-approval for homebuying is like securing your ticket before you head to the airport. A pre-approval letter demonstrates that you’re ready to start this new journey, and that you’re prepared to take the next step. A mortgage pre-approval is just as important for you as it is for the potential seller you’ll approach.
How does pre-approval improve my chances of getting the home I want?
A pre-approval offer demonstrates financial readiness and can increase your success rate in a competitive market. Having a verifiable offer letter lets you show your buying power, proves that you’ll be able to secure a loan, and helps reinforce that it’s wise to sell to you. The real estate market in Canada is especially competitive this quarter, so knowing how to prepare for pre-approval will help you compare rates and land the best rate possible.
Pre-approval helps you plan for responsible ownership
Pre-approval lets you establish what comes next before you fall in love with a property. It gives you the information you need to build a strong financial plan and to know what filters to apply to your search. It’s similar to the rigor applied when looking for a life partner. For example, if you’re sure you want children, it doesn’t make sense to seriously date someone who doesn’t. Pre-approval lets you establish how much interest you’ll be paying and how big your mortgage should be, so you can look for what fits your budget.
What should I do after pre-approval?
With your pre-approval letter in hand, you can approach a real estate agent with a clear picture of what your financial guidelines are. Now you’ll be able to filter out homes that aren’t within your limits and act fast with an offer when you find the right place. Remember that your rate will only be good for a set number of days and is based on your financial consistency. Use your rate to plan for your financial future, and use online tools to lay out a budget. You can use Houseful to filter results and hone in on a house that’s right for you.
How else can I financially prepare for home ownership?
As you’re considering next steps and beginning the pre-approval process, you can also use online tools like a True Home Affordability Calculator to map out your financial plan and establish how much home you can afford. Meet with a financial advisor to explore more tools and to establish a plan that makes sense for your financial goals.
Tips for successful mortgage pre-approval
If you’re a first-time homebuyer, avoid common mistakes by preparing thoughtfully for pre-approval.
- Compare pre-approval offers. Ask potential lenders to give you multiple options, ask about fees, and compare interest rates and approval offers. Consider using the Mortgage Professionals Canada directory to find a broker who can help you find and compare offers. Most brokers operate off of a commission, so you won’t typically be charged up front for their services.
- Ask questions. Don’t be shy! Prepare questions for your potential lender, and ask how long the pre-approval is good for, whether interest rates are subject to change, and if you can extend your pre-approval rate if you need more time to look for homes.
- Start with pre-qualification to establish what your rate might be, and use the results to prepare accordingly. If your pre-qualification isn’t what you hoped, now is the time to pay off debts, improve credit, ask for a raise, or get serious about saving and managing money to improve your assessment before pre-approval.
- Be transparent with your lender. Once you begin the process, have your documents ready and be prepared to offer information about your finances, income, debts, and assets. Anything you don’t disclose will likely be revealed by the pre-approval process, so it’s best to be open up front about your true financial picture. A lender can help you establish the best rate and maximize your financial possibilities.
- Don’t make changes once you’ve been pre-approved. A pre-approval is based on factors like steady employment, a solid credit score, or a good debt-to-income ratio. If you choose to change jobs, open a new credit card, or make a big purchase, you could jeopardize the rate you’ve been offered.
- Pre-approval shouldn’t determine the exact amount you’ll pay. If you have a solid financial portfolio, you might be offered pre-approval for a loan that’s higher than you thought. Just because you qualify for a big loan doesn’t mean that it’s wise to use the full amount. Use pre-approval as a reference, not a map.
Houseful can help you find the right home.
Use the advanced filters on Houseful to explore options within your price range and compare homes, neighbourhoods, and options.
Find more information on how to buy a home, how to sell your home, and mortgage and finance tips, see our Home Journey How-To’s or sign up at houseful.ca.