If you’re thinking of purchasing a property then you’re probably also thinking of applying for a mortgage. Although many factors go into choosing a property such as area, square footage, number of bedrooms, local amenities, one of the most important factors is affordability. A mortgage is one of the largest financial contracts most of us will ever take on in our lives. So how do we make sure it is not larger than our wallet?
Before checking out the local open houses and peeking into the new subdivision models in your area, it is strongly recommend to calculate the amount of mortgage you can actually afford. It’s good practice to know your magic number. The last thing you need is submitting a purchase offer and having your mortgage application declined. Going back two steps is already upsetting enough in Monopoly, don’t make the same mistake when it comes to your mortgage!
How Does It Work?
A pre-approval will put you a few steps ahead of the game. A pre-approval will calculate how much you can afford. The bank will check your credit score, income and existing debt, which will aid in determining which price range is within your means. Think of it as a financial X-ray. It will provide a peace of mind and confidence.
The best part about obtaining a pre-approval is it will provide an advantage over other purchasers who haven’t gotten one. The seller will absolutely love a purchase offer with no conditions because there will be no last minute fall throughs to anticipate such financing problems on the buyer’s side. A pre-approval will also indicate you are serious buyer. Providing the seller with no hurdles to cross, means all they have to do is sign the accepted offer. An offer with conditions means the purchaser must still meet some kind of criteria, such as a mortgage approval.
Back to Basics
Example: Melanie is buying a house, without a pre-approval, therefore she doesn’t know if the bank will approve or decline her mortgage application. After a stressful search, her exhausted real estate agent finally presented Melanie a house she actually loves, and so Melanie proudly submitted a purchase offer but with a condition for financing. If the bank declines Melanie’s mortgage application, the condition is not met and Melanie loses her long awaited home, which puts the house back on the market (and leaves the seller very frustrated!). Melanie takes two steps back.
In the above simplified example, if Melanie attained a pre-approval she could’ve made a purchase offer with no condition, the seller would’ve been extremely tempted to say yes to Melanie over any other offers with conditions.
Benefits of a Pre-Approval
2. peace of mind
4. affordable price range
5. saves time
Important Factors To Be Aware Of
- A pre-approval is not the same as an approval, there is still a chance the mortgage can be declined for various reasons, in other words a pre-approval does not guarantee an approval for the mortgage
- A preapproval means the bank has screened your credit history and income and is prepared to potentially lend you money
- The search of a house should start in a lender’s office not at the real estate agent’s, plan and discuss your financing options before searching for a property