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Before you start your search for a home, it’s important to get pre-approved for a mortgage by a lender.
Why it’s important
Getting a pre-approval will help you determine how much you can afford to spend on a home and lock in a mortgage rate. Once you’ve been pre-approved, you can make an offer on a home. Without being pre-approved, it’s quite possible that you won’t actually be able to get the mortgage needed to make the purchase.
What’s involved in a pre-approval
A mortgage pre-approval involves a mortgage broker or financial institution assessing your financial situation and determining how much they’re willing to lend you and at what interest rate.
In making this determination, they’ll rely on some crucial information, such as:
- Your income
- Your credit score
- Your current assets and liabilities
- The size of the down payment you intend to make
The process is also beneficial because it locks in an interest rate for a period of usually 120 to 160 days. However, you’re under no obligation to take this rate, and if interest rates fall in the meantime, a bank will give you the better rate instead.
A pre-approval is not a guarantee
It’s important to keep in mind that just because a financial institution has pre-approved you for a mortgage, it doesn’t guarantee you’ll receive a mortgage. There are a number of reasons why it may end up denying the mortgage application. These factors include:
• A significant change in your financial situation
• If the home’s appraised value is materially below the purchase price
• Issues regarding the physical condition of the house
Buy within your means
Even if you’re pre-approved for a certain amount, it doesn’t mean you should purchase the most expensive property you can afford. Doing so might put you in a financial bind should there be any unanticipated costs, such as home maintenance and repairs or a jump in condo fees. You should be prepared for the unexpected.