Mortgage pre-approval – what is it and when should you get it?
Buying a house is an interesting time in one’s lifetime, and why shouldn’t it be? You’re making what’s likely to be the greatest purchase in your whole life, and it’s somewhere you could be living for the following decades.
However, getting approved for a loan and finding a homes you can afford is tricky at the best of times, and without proper guidance from a home loan lender, you could be going totally unaware, risking to find your dream house only to find that the lender won’t approve you.
The lending company may consider you won’t be able to afford the property or judge the property itself as too big of a risk to take on. You could avoid this situation by ensuring your mortgage pre-approval prior to begining your home search.
What is mortgage pre-approval?
Mortgage pre-approval is basically an initial assessment from the lending company where they agree, in principle, only to lend you a certain amount to buy your property.
In essence, a mortgage pre-approval serves two purposes:
- It indicates just how much the company will lend you, and what type of house you can afford to buy
- It establishes your financial position with yourself and the lender
Contrary to many misinformed first-time homebuyers, a pre-approval is not a binding guarantee of investment – things that may still change during the homebuying process can affect your ability to secure a loan. However, it is typically a smart move to get pre-approved before settling on a property to buy, because it can give you a much better answer to the question: “Can I afford to purchase my dream home?”
When to get pre-approval
Home pre-approval letters are usually valid for 60 to 90 days. Lending companies put an expiration date on these letters as your credit profile and finance could change. When a home loan pre-approval expires, that means you will need to fill out a new mortgage application and send updated paperwork to receive another one.
If you’ve found an ideal property and suspect you might have some issue getting a loan, going through the pre-approval process can help you identify credit issues – and potentially give you time to tackle them.
The sooner, the better – when you seek pre-approval six months to one year in advance of a serious home search place you in a stronger position to improve your overall credit score. In doing so, you will have more time to save for closing costs and down payment.
When you’re prepared to make offers, sellers often ask about a mortgage pre-approval and, in some circumstances, proof of funds to show that you’re a genuine buyer. In major housing markets, home sellers have an advantage as there is a strong buyer demand and a restricted number of houses for a sale – they may be less likely to accept the bid without pre-approval letters.
The pre-approval process
Applying for a home loan can be both nerve-wracking and exciting, no doubt. Some online lending companies can pre-approve you within hours, while some can even take days. A pre-approval interval depends on the complexity of your finances and on the lender.
New-home buyers will need to fill out a mortgage application. That includes identifying information, as well as social insurance number so that the lending company can pull your credit. Even though a mortgage credit check counts up as a hard probe on your credit reports – which may impact your credit score – if you’re shopping for several lenders in a short amount of time, the combined credit check counts as a single inquiry.
Here’s an example of a uniform mortgage application. If you’re applying with a co-borrower or with your spouse whose income you need to qualify for the mortgage, both candidates will require to list employment and financial information.
- Terms of the loan and type of mortgage
- Purpose of the loan and property information
- Borrower information
- Employment information
- Monthly income and combined housing expense information
- Liabilities and assets
- Details of the transaction
Can I get multiple pre-approvals?
Doing multiple pre-approval in a short amount of time can leave a mark on your credit history, since the lending company will usually run a credit check, at least with a full pre-approval assessment. In doing so, you will leave an inquiry on your credit history.
What are the chances of getting dismissed after a pre-approval?
If your financial or personal status changes between pre-approval and your final application, your pre-appproval will most likely have to be reassessed – which can mean anything from:
- You receiving a lower income
- You or your spouse losing their job
- Having to spend your deposit on an emergency
- A change in the property’s condition
- A change in government policies and more
Not to mention that changing interest rates, such as the ones we experienced in 2019, can also influence how much you can borrow. The lender will typically evaluate your repayment ability over the life of the theoretical loan based on their own usability defence – increasing interest rate might mean a once-approved request is denied, due to you being a risk of not meeting higher payments.
What happens next?
The lending company is required by law to provide a document called loan estimate within three business days of getting your completed mortgage application. The document notes whether the mortgage has been pre-approved and summarizes the loan amount, types and terms of the mortgage, estimated interest, interest rate and payments, estimated closing costs (even lender fees), an estimate of house taxes and homeowner’s insurance.
If you happened to be pre-approved for a loan, your file would eventually transfer to a loan underwriter who will check your documentation against your loan application. The underwriter also has to ensure you respect the borrower guidelines for the specific loan program for which you’re applying.