Seeking Pre-Approval
By on Apr 02, 2008
Is it really that important to get pre-approval for a mortgage before you go home shopping? Yes. Preapproval has a number of benefits, the biggest of which is saving money.
Having a pre-approved mortgage means that you're arranging financing for your home before you buy. By giving all the necessary financial and personal information to a financial institution ahead of time, they can agree to finance you for a designated amount of money. This allows you to shop for your new home knowing what price range you can afford, what the interest rate will be, what your payments will be and how often they will be due. Your pre-approval also takes into account legal fees and other expenses so there are no surprises when you've found your dream home.
You might confuse pre-approval with pre-qualification. Pre-qualification requires that the customer provide the necessary information but the lender doesn't verify the information and there's no assurance that the mortgage will be approved. The only benefit is that you know based on the information you provide (correct or not) how much you could safely mortgage. A rate commitment, on the other hand, is when the lender guarantees a certain interest rate. So if you qualified for a mortgage through that institution the rate wouldn't change, but there is no assessment of your financial position at all and no approval. Obviously, it's much more secure to have pre-approval and looks better when offering to buy a new home.
How exactly does pre-approval save you money? When you receive pre-approval, the financial institution will usually guarantee your interest rate for up to 90 days, giving you time to seek out your new home. If the interest rates go up, your guaranteed rate will stay the same. However, if they go down, you receive the lowest interest rate during that 90 day period. In the long run, this could save you hundreds of dollars.
So what's the catch? There isn't one. Just because you have pre-approval doesn't mean that you're obligated to find a house within your 90 day grace period. You don't have to commit to a house, nor are you required to obtain a mortgage with that particular financial institution. And there is no charge for getting pre-approval. It takes approximately 48 hours to process pre-approval so you won't be waiting weeks or even months while you watch the housing prices skyrocket.
What do you need to get pre-approval? You'll need proof of full-time employment, proof of income, proof of down payment and a good credit rating. Ask for a credit check when you request pre-approval so that you can deal with any unresolved problems before you buy your home. This is not a part of the pre-approval process, so you may have to pay an extra ten dollars or so, but it's well worth it in order to head off any problems at this stage. Some documents you might want to have on hand, a letter from your employer on company letterhead outlining your name, position, gross annual income, and number of years employed with the company; if you're self-employed, you will need three years of financial statements and tax returns; your social insurance number; at least three years of residences and employers; your banking information; your assets and total value; liabilities; past credit problems and a list of questions that you would like answered.
After you have received pre-approval, all you have to do is have a property appraisal completed and submitted to your financial institution. Once this has been done, the final terms and mortgage amount will be drawn up based on the actual value of the home you have chosen. As long as it's within your pre-approved price range your agreement stands, but the values might change slightly if your home is actually less than the maximum.
If you seek pre-approval, you can rest a little easier throughout the homebuying process. A little bit of preparation can go a long way in helping you get your dream home.
