Mortgage Pre-Approval 101: Everything You Need to KnowCredit: RODNAE Productions Via Pexels

Posted On Wednesday, 11 May 2022 21:51

Taking out a mortgage to close your dream property is an excellent way to secure the home and reduce the financial burden for yourself or your family. Getting pre-approved for a mortgage reduces your risks and allows you to determine your affordability.

A mortgage pre-approval is a low-risk way to establish how much money a lender is willing to provide to support you based on your current financial situation. A pre-approval will guide you during your decision-making process and help you determine what you can afford before you make an offer on a home.

This guide will help you stay informed to ensure you’re taking the right steps when looking for mortgage pre-approval.

The Importance of Getting Pre-Approved

A critical question that potential homeowners often wonder when looking to purchase a property is, how much mortgage do I qualify for? Getting your mortgage pre-approved answers that question, allowing you to make an informed decision. During this process, you’ll have a better idea of the maximum amount of mortgage you’re eligible to receive, your estimated monthly payments, and your potential interest rate.

Getting pre-approval before you begin house hunting helps you determine your budget and narrows down your search based on your affordability. This can save you time and money, allowing you to focus more on the homes you might be able to purchase. 

Understanding Pre-Qualification vs. Pre-Approval

Many buyers aren’t aware of the difference between pre-qualification and pre-approval. The ability to differentiate between the two can simplify your home search.

Mortgage Pre-Qualification

If you need a quick estimate of how much you may be approved for, pre-qualification should be one of the first steps in your home buying journey. Many financial institutions offer online tools which you can use to determine the amount you may receive based on your income, debt, and assets.

Mortgage Pre-Approval

When you want a more accurate representation of how much you might be able to borrow, pre-approval will come in handy. This is when your lender will check your credit score and overall financial status to determine your eligibility.  

Mortgage pre-approval is an official promise from a lender, but it is not a guarantee that you will receive the amount stated on the document. The lender will perform another financial check before your house closes to ensure that nothing has changed since you were pre-approved.

How to Get Pre-Approved

Getting pre-approved is straightforward, but you need to know the basics before proceeding.

Gather Your Proof of Income 

The lender needs to verify that you have a stable income source and can pay back the loan promptly. Gather your recent pay stubs, any additional income such as bonuses, and the two most recent years’ tax returns.

Show Proof of Assets

Another way for the lender to confirm your affordability is through bank statements and investment account statements to prove that you have sufficient funds for the down payment and closing costs. Provide all documentation with your proof of assets, cash reserves or a gift letter (if you’re receiving money from a friend or relative to assist you with the purchase).

Make Sure Your Credit is in Good Shape

A good credit score is a key to a favourable mortgage. If your credit score is high, the lender is more likely to trust your financial abilities and may offer a lower interest rate. On the other hand, a low credit score reduces your chances of getting pre-approved and may result in higher interest rates or require you to make a bigger down payment.  

Before applying for pre-approval, check your credit score to see if it’s in good standing. If not, try to boost it by paying off existing debt before proceeding with the pre-approval process.

Provide Employment Verification

Your lender may ask for employment verification before proceeding with your application. They may request a letter to confirm your work status and salary. A lender may also call your employer directly to verify this information, even if they already have your pay stubs and other related documents.

Due to mortgage fraud, lenders want to ensure that all the information you mentioned in your application is accurate.

Provide Additional Documents

The lender may ask you for additional documents, such as a copy of your driver’s license and Social Insurance Number, to verify your identity and pull a credit report. Be prepared to provide these documents or any other ones they may ask for during or after the pre-approval process.

Shop Around

There is no cost associated with getting pre-approved, so it can be helpful to shop around when looking for a lender. Comparing rates from multiple lenders will allow you to decide and choose the one that works best in your favour.

Next Steps If You Don’t Get Pre-Approved

It can be stressful not to get pre-approved, but it can happen. If you are declined, there are a few things you can do. But, your next steps can vary depending on why you were declined.

Consult Other Lenders

Even if one lender declines your application, another lender might be willing to take the risk. However, they may charge you a higher interest rate.

Improve Your Credit Score

Your credit score plays a significant role in your approval process. If your score isn’t in good standing, pay off existing debt and avoid seeking new credit to improve your status.

Make a Larger Down Payment

You may need to pause your home buying plans for a little while until you can save a larger down payment. When you make a larger down payment, you’ll need a smaller loan, which might be easier to get.

Get a Co-Signer

If your income or credit score isn’t sufficient for your application, you can ask your parent to co-sign your application. Your co-signer is responsible for making your mortgage payments if you fail to do so.

Celebrate Your Pre-Approval

After you’ve gone through the process and finally received your mortgage pre-approval, start celebrating by starting your house hunt. A pre-approval will bring you one step closer to moving into your new home!

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