If you’re planning to buy a house, a crucial first step is figuring out how much money you’re eligible to borrow from a bank for the purchase. Here’s why getting preapproved for a mortgage before you start house hunting is a smart move:
1. It gives you a clear budget. The bank assesses your income, credit score, and other financial details to estimate the maximum mortgage amount they’d be willing to lend you. Armed with this information and a pre-approval letter, you can realistically narrow down your home options to what you can actually afford. This pre-approval letter is useful for realtors also, as it guides them in helping you find the best-fit property.
2. It indicates to sellers that you’re serious. Agents often ask for a pre-approval letter as proof of a buyer’s serious intent. By including it in your offer on a house, you can stand out from other interested buyers. It doesn’t guarantee your offer will be accepted, but it reassures the seller that you can afford the house, reducing the probability of a deal falling through.
HOW TO GET A MORTGAGE PRE-APPROVAL
1. Save for a down payment. The bigger your down payment, the lower your interest rate and monthly payments. Keep in mind you may also need to cover the cost of private mortgage insurance (PMI) if your down payment is less than 20% of the house price. Depending on the type of mortgage you qualify for, your down payment could range from 3% to 20%.
2. Prepare necessary documents. For a mortgage pre-approval, you’ll typically need to provide evidence of your income and job stability, proof of assets for the down payment, a good credit report, and valid identification.
3. Compare lenders. Make sure to seek offers from several lenders to find the most favourable rates. Try to get quotes from at least three lenders.
4. Submit your application. Once you’ve identified a lender with the best loan terms, it’s time to submit your pre-approval application. This can often be done online, but some lenders may require an in-person branch visit or discussion with a mortgage loan officer.
A word of caution: just because you’re preapproved for a certain mortgage amount doesn’t mean you need to buy a house for that price. The larger your mortgage, the higher your repayments and the more interest you’ll pay over time. Additionally, a more expensive house could mean increased utility costs, furniture needs, maintenance expenses, property taxes, and insurance. Giving yourself some borrowing leeway can also ensure you have the financial flexibility to achieve other objectives, like saving for retirement or funding a future car purchase.
