The Importance of Pre-approval: Getting Your Finances in Order
Posted By: Rachel Kavanagh
January 10, 2024
Searching for a house for sale in Markham? Before pursuing your dream home, you need to be confident that your finances are in order. Nothing is worse than discovering your ideal home only to find that you don’t qualify for financing.
This article delves into the significance of mortgage pre-approval and how it can help you steer clear of potential disappointments in your home-buying journey.
What is mortgage pre-approval?
Mortgage pre-approval is the process of verifying that you qualify for a mortgage with your lender of choice. Your lender will go through the credit history process and research your finances to confirm your history is dependable, determine what mortgage you can afford, and then agree to provide a mortgage based on a set limit and interest rate.
However, pre-approval does not always guarantee that the mortgage will be available when you are ready to buy. You must maintain a consistent income and credit score to ensure your mortgage goes through as planned.
How does pre-approval work?
Once the lender qualifies you for a mortgage, they provide a limit for the loan and set an interest rate. The interest rate remains valid for an average of 60 to 120 days, allowing you to lock into a rate that helps avoid future increases.
Should the lender reduce the rate in those 60 to 120 days, they will usually offer you the better rate.
Why is pre-approval advisable?
Pre-approval when buying a house for sale in Markham tells you whether you can afford a mortgage while providing a budget. Without understanding how much a lender is willing to offer you, it is impossible to start your house search.
You need to set a budget to narrow down your house-hunting options and provide a limit to how much you are willing to offer a seller should you find a home you are interested in purchasing. It also ensures you have the financing available for your purchase, if and when you find a home.
What are the benefits of pre-approval?
There are several benefits to mortgage pre-approval when buying a house for sale in Markham, including the following:
- You understand how much you can afford in a home.
- You can narrow down your house hunt to make the process quicker and easier.
- You can lock into a preferred interest rate without missing out, should interest rates drop.
- You have the lender’s ear to assist in the home purchase process.
- You understand how much your mortgage payments will be to ensure you feel financially comfortable with such an investment.
- You can gain a competitive advantage in multiple offer scenarios with proof you are financially sound.
- You can speed up the closing process.
- You have a better understanding of your finances to inform your home purchase decisions.
How does the pre-approval process work?
Regardless of the lender, the pre-approval process is quite simple and works as follows:
- You approach a mortgage specialist to discuss the details, such as your down payment, ideal purchase price, and finances.
- You discuss the types of mortgages available so you understand your options and find one to suit your needs.
- You provide financial information, including proof of income, financial history, assets and loans, etc.
- The lender will conduct a credit search to confirm your financial health.
- If approved, the lender will inform you of the conditions, which can last from 60 to 120 days.
- You must maintain good credit and a stable income during the term of the agreement.
- Once you place an offer on a home, the lender will revisit the pre-approval before determining if they are willing to proceed with the loan.
How to Increase Your Chances for Pre-approval
There are several steps you can take to increase your chances of pre-approval, including the following:
- Address debt: If you have debt, paying it down before applying for pre-approval helps set you on the right path to financial health. The less debt you have, the better your credit score and the less financial burden you have to contend with when you take on your mortgage.
- Increase your down payment: The higher your down payment, the lower your mortgage and the more positively lenders tend to view your financial health. Focusing on savings and paying off debt helps create a much more positive picture for potential lenders.
- Improve your credit score: If you have a less-than-stellar credit score, improving it as quickly as possible is essential. While paying off debt is a good start, your payment habits could be contributing to your issues.
Ensure you make payments for expenses such as rent, credit cards, utilities, etc., on time so you help set a history of dependability to create a more impressive credit score.
- Increase your income: This is easier said than done. However, you might consider taking on a part-time job or pursuing a career change that offers more opportunities to improve your earning potential.
Sometimes, having two jobs can work against you, as it could send the wrong message that you are struggling financially.
- Avoid credit seeking: Credit seeking, such as applying for several loans or credit cards, reflects badly on your credit score. Therefore, you should avoid applying for loans and credit when you are planning to apply for mortgage pre-approval.
- Follow up on your credit score: If your credit score is lower than expected, follow up with the credit bureau to make sure there aren’t any errors.
Sometimes, the credit bureau has outdated or incorrect information, and you have a right to request that they set the record straight.
- Collect your financial records: Be sure to provide as many financial details and records as possible to help show you are reliable and capable of paying your mortgage.
If you are self-employed, be sure to have clear records showing a pattern of earning a reliable income using your tax returns over as many years as possible.
Contact the Real Estate Experts
Before house-hunting, it’s essential to get your finances in order by getting a mortgage pre-approval. It helps you understand your budget, lock in a preferred interest rate, and gain a competitive advantage.
If you are looking for a house for sale in Markham, the Benczik Kavanagh team is ready to help. We are happy to discuss the mortgage process and recommend a mortgage specialist to assist with pre-approval.