If you’ve been renting or living at home and you’re now ready to buy your own place, you’ll likely want to know how much you can afford. While your finances are a significant factor, getting a mortgage pre-approval is a way to ensure you know exactly how much buying power you have.
A mortgage pre-approval is a quick way to see how much a lender is willing to extend you when you’re ready to start house hunting. This is arguably the first step you should take when purchasing a home since you’ll know how much you can afford.
During the pre-approval process, you’ll find out the following:
Once your mortgage pre-approval goes through, your interest rate is locked in for 90-130 days. If interest rates go up during that time, you still get the promised rate. However, if rates fall, you can see if you can get a better mortgage rate when you’re ready to close.
What many people don’t realize is that there’s a difference between pre-qualification vs. pre-approval. Knowing how the two work could help you during your home search.
If you need a quick answer on how much you may be approved for, then a mortgage pre-qualification is what you want. Most financial institutions have an online tool where all you need to put in is your income, debt and assets. Based on that information, you’ll get an estimate of how much you’d be approved for. Pre-qualifications only take a few minutes and can be done online or over the phone.
This is where your lender will check your credit and confirm your financial information. Once approved, your lender is committing a mortgage to you at a set interest rate for a fixed period of time.
Although mortgage pre-approval is a promise from a lender, it’s not a guarantee. When you’re ready to close, the lender will do one final financial check to see if your finances have changed since the pre-approval was made. They may also appraise your home, as the property value of the home you purchased could also affect your mortgage.
Since it’s free to get pre-approved, it’s a good idea to shop around.
During the process, most lenders will run a hard credit check to assess your finances, so make sure your credit score is in good shape. Multiple credit inquiries from a variety of lenders within a short period, typically 14 to 45 days, will appear as only one hard check on your credit file, so the impact on your credit score is negligible.
You can contact various mortgage lenders to find out how much you’ll be approved for and what interest rates they’re offering. Alternatively, you could seek out the assistance of a mortgage broker who will shop around on your behalf. Brokers get paid by the lender, so there’s no cost to you.
Regardless of which route you go, you’re going to need to provide the following information:
Once you apply, it takes only about 24-48 hours to get an answer. With formal approval in place, you’ll know exactly how much you can afford. That said, you need to factor in additional costs such as closing costs, moving costs, ongoing maintenance and any additional saving goals that you may have.
In other words, you may not want to max out your budget on housing.
Unfortunately, not everyone gets approved. If that happens to you, there are a few things you could consider depending on the reason why you were declined.
Having your finances in order is essential to getting a mortgage. If you’re ready to start looking for a home, get a pre-approved right away. It doesn’t hurt you in any way and it’s quick to get an answer. Once approved, you can start looking for a home that fits within your budget.
Barry Choi is a personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and travel. You can reach him on Twitter: @barrychoi.