In our previous post on buying a house post-pandemic, we talked about the importance of getting a mortgage pre-approval. In today’s post, we will explain in detail how to get a mortgage pre-approval.
What’s mortgage pre-approval?
Mortgage pre-approval is a process in which the lenders will analyze your finances and come up with the maximum amount of mortgage you qualify for and the interest rate for the mortgage.
Generally, one can get a mortgage through a lender or mortgage broker. A lender can be banks, mortgage companies, insurance companies, loan companies, and the likes. Mortgage brokers help you get a loan from lenders. You have to do enough research to find the right lender who can give you optimal interest rates. So either you can look for a lender on your own or approach a broker who can take care of finding you the right lender. It is crucial to take your time before finalizing a lender because you’ve to pay penalty if changing the lender in the middle of the process.
Wait, there is something called pre-qualification?
Yes. Pre-qualification is when you submit your finances to the lenders to know the approximate loan amount you will be qualified for. Pre-qualification can be the preliminary step when you start thinking about buying a house. It gives you an idea of how much you can afford to buy a home.
Pre-approval is when the lender does a hard check on your finances before finalizing the maximum mortgage amount.
What are the financial aspects of pre-approval?
3. Credit score
4. Down payment
6. Proof of employment
7. Proof of your current income
These are the significant aspects considered by the lenders while giving you a mortgage pre-approval. Other things to be accounted for are spousal/child support, duration of working with your current employer, credit card balances, and similar miscellaneous financial factors.
A little more about credit score and down payment
In the mortgage marketplace, lenders typically follow these rules of thumb regarding credit score and mortgage approval:
- A score of 700+: Lowest rates apply.
- A score of 650 – 700: Can also be approved for some of the best rates.
- A score below 650: There is still a good opportunity for mortgage approval, but you need to go for a substantial down payment or show a stable employment record.
When it comes to the downpayment,
5% -19.99%: Known as CMHC insured and are the lowest rates because the CMHC assumes all risk and the lender has little to no threat.
– 20% – 25%: Avoids CMHC insurance and associated borrowing costs, but the rates are a bit higher.
– 25% – 30%: Mortgage lenders have a good comfort level with this amount. Therefore lower rates (often some of the lowest rates are seen here!)
– 35% or more: Mortgage lenders have a great degree of comfort with this level of down payment and provide some of their lowest rates.
What is a pre-approval letter?
A pre-approval letter is an authentication you can get from your lender. It contains all the details such as your qualified mortgage amount, credit profile, asset details, etc. – which make you a serious buyer in a competitive housing market.
How much time does it take for the pre-approval?
From a few minutes to days, the pre-approval time depends on the lender. However, many lenders claim to do it in a day provided all the necessary proofs and documents are in place. Many lenders are ready to do the approval online as well, considering the situation. If safety is your priority, you should take the approval process online.
Other important factors
A mortgage pre-approval is the maximum amount you get – it doesn’t mean that you will get the exact amount, or you’ve to go for a property for that amount. Remember that you’ve to pay back the mortgage with interest. Don’t go beyond your budget just because your pre-approval amount was more than your budget.
You should ask for the validity of the pre-approved rate, whether an extension is possible, and if they can change the interest rate if there’s a drop since the pre-approval.
What if the lender rejects your pre-approval?
. Ask for a lower mortgage amount
. Ask someone to cosign for you
. Go for a higher interest rate or a higher down payment.