When you’re thinking about buying a new home, you know the mortgage is going to be a big part of your decision. Banks look at your credit score, your income, and your monthly debts to determine how much they’re willin g to lend you. A mortgage pre-approval isn’t a commitment, but it can let you know whether or not you’ll be able to get a mortgage.
Pre-approval is especially important for those looking into resale homes. Those sales move quickly, and if the seller knows you have pre-approval, they may be more likely to accept your offer.
Those who want to purchase brand-new homes sometimes think getting a pre-approval isn’t very important. There’s not the same sense of urgency. Surprisingly, there are several reasons why you should apply for pre-approval when buying a new home.
1. Knowing How the Bank Sees You
It’s important to get a sense of what a bank sees when they look at you. You may think you’re doing well financially because you always have enough money to pay the bills, but if you’ve never taken out a loan or gotten a credit card, your credit score may be too low to qualify. During the pre-approval process, you may also realize the bank doesn’t count all of your income because a large portion of it comes from bonuses or overtime pay. These things can greatly affect how much money the bank is willing to lend you.
When you apply, you have to provide the bank with financial documents. They’ll get an accurate look at your financial picture and tell you how much money they’ll loan and what interest rate you’re likely to pay.
2. Setting a Budget for Your New Home
With the pre-approval, you’ll know how much money the bank is willing to lend. Rather than a set amount, the bank typically tells you a maximum monthly payment they’ll allow. They do this because property taxes, homeowner’s insurance and mortgage insurance can fluctuate, and these amounts are included in the monthly payment. If you choose a home that has lower property taxes, for instance, you can afford a home with a higher price tag.
Of course, you shouldn’t use the bank’s maximum monthly payment alone. You also need to determine whether their limit is actually affordable for you given all of your other monthly commitments. Sometimes, it’s smarter to set a lower budget for yourself.
3. Learning You Need to Improve Your Credit
As we mentioned, with the pre-approval, you’ll learn your credit score. You may see your score is just a few points away from a better credit tier and a lower interest rate. In any case, you can use the time in between the pre-approval and actual purchase date to improve. Make sure to pay your bills on time and pay down any debt you may have.
4. Playing with Actual Figures
You’ve probably already started using mortgage calculators to play around with the figures. These tools can help you get a sense of how much different homes cost on a monthly basis. You can also see how a higher or lower down payment affects your monthly payment. After the pre-approval, though, you can get more serious about using the calculators because you’ll know the exact interest rate you’ll be able to get on the mortgage. If you’ve been using the advertised rates, you may be surprised by how much the actual rate you’ll get can change the monthly payment. You may need to set your sights on a more affordable home.
5. Making Your Purchase Easier
Getting a mortgage isn’t necessarily difficult, but there’s definitely a lot of paperwork involved. A missing pay stub or tax form can seriously slow down the process. When you get pre-approved, though, you’re starting the process early. The bank will already have your important information on file when you really apply for the mortgage. Pre-approval also significantly reduces the chance that your financing will fall through at the last minute because the bank has already said they will lend you money. As long as there hasn’t been a dramatic change to your financial situation, you should be fine.
6. Locking in Rates
With a mortgage pre-approval, you’re usually able to lock in rates at the current level. Edmonton mortgage rates constantly fluctuate, and they’re expected to increase throughout 2018. Locking in ensures you’re getting the best deal. If rates drop by the time you’re ready to purchase a home, you’ll be able to get the better rate. There’s no risk involved.
7. There’s No Commitment
Getting pre-approved for a mortgage isn’t a commitment. You don’t have to use the bank that pre-approved you, and you’re not locking yourself into a mortgage payment. You’re just getting a sense of what you can purchase. If you’re starting to get serious about buying a home, there’s really no reason not to get pre-approved for a mortgage.
Your mortgage pre-approval gives you a clear picture of what you can afford. Once you have pre-approval, come check out StreetSide's affordable new homes. You’ll be surprised by how far your money can go.