Should You Get Pre-Approved for a Mortgage?

March 29, 2016 | Real Estate Strategy

Shopping for real estate starts out fun. Who doesn’t love snooping in other people’s homes and dreaming up a new life for you and your family? (It can turn out not fun after a few lost offers, but that’s a story for another time). But, the part that most of us don’t love is getting a mortgage pre-approval. This part requires administration, getting tax documents, asking HR departments for letters of employment, and letters of financial gifts. Even when you’re working with the most efficient mortgage broker, this part can feel like a slog.

Understandably, many homebuyers start the process by looking at homes and then getting their financing in order. However, this sequence of events is out of order. You should get pre-approved for a mortgage first and then go shopping. Getting pre-approved for a mortgage is an essential first step to buying a new house. Except for 100% cash buyers, everyone should be getting pre-approved.

4 Reasons to Get Pre-Approval

1. Find out how much you can afford: you likely already know how much your monthly payments can be. However, knowing your monthly cash flow doesn’t easily translate into a purchase price for a home. For that, you’ll need to know your interest rate. The higher the interest rates, the lower your purchase price. Interest rates change based on several factors within and outside your control.

2. Lock in an interest rate: Interest rates are currently rising. But, even when they’re not, it is essential to lock in an interest rate. Most mortgage brokers can guarantee a rate for ninety days. That gives you ninety days to buy and close on your home. The ninety-day rate-hold saves you money if the interest rates increase while shopping. Also, interest rates fluctuate almost daily at the banks. So, it’s not just the bank of Canada’s overnight lending rate that signals an increase. Most banks change their rates by a little bit every week. Even if you have a locked-in rate, you will still get the lowest rate available to you when you ultimately buy something. In other words, locking into a rate doesn’t exclude you from enjoying rate decreases.

Searching for more information about mortgages? Check out these other blog posts.

3. Solve problems in advance: Some financial problems may stop you from buying a house. You often don’t even know about these issues until they come up in a financing pre-approval. It is, therefore, ideal to complete the pre-approval as early as possible so that you can resolve these. Here are a few examples:

A) Inaccuracies on your credit score. Your credit is vital for your mortgage pre-approval. However, there are often errors on these reports that lower your credit. Check this out early so you have a reasonable amount of time to correct these issues.

B) Income tax in arrears: You can’t buy a house if you haven’t filed income taxes. Full stop. No exceptions.

C) Employment status: Many public-sector and healthcare jobs are contract positions renewed yearly. Functionally, this is the same as a full-time position for the employee. However, it makes a big difference in your mortgage application. You want to give your mortgage broker time to create your file if your employment status deviates from the straight-forward “full-time salaried” that banks prefer.

4. Firm offers: You will be much more successful when you offer if you do not have a financing condition in your offer. While there is still risk involved with removing a financing condition, a mortgage pre-approval dramatically reduces that risk.

You should get your mortgage pre-approval early in the process of shopping for a new home. A Pre-approval will help guide your home search and remove some of the stress from the process.

Ready to find your perfect home? Call us at 416-788-1823 or email kim@kimkehoe.com today to get started.