One of the first steps to consider in the process of buying a new home is applying for a mortgage pre-approval. This is an important step in knowing your borrowing capacity for a mortgage. A pre-approval is all the more crucial in 2022 in the context of multi-offers and real estate bidding to get a concrete idea of your budget and be ready to move forward in the buying process faster.
What is a mortgage pre-approval?
A mortgage pre-approval request is made with a lender or mortgage broker and gives you access to important information for your real estate research. Concretely, a pre-approval determines:
- The maximum amount you can borrow for your mortgage
- An estimate of the monthly payments associated with the maximum amount
- The interest rate on your first mortgage term
Depending on the lender, the interest rate is guaranteed for a period of 60 to 130 days.
This information is accurate and can considerably help you in your real estate research. Plus, a mortgage pre-approval application is free and doesn't commit you to anything with the lender.
Information to be provided for a pre-approval request
Several documents and information must be provided to the lender or mortgage broker in order to assess your financial situation and determine the maximum amount you can borrow. They will examine:
- Your assets (what you own)
- Your income
- Your level of debt
To do this, you will need to provide the following information:
- Proof of identity
- Proof of employment
- Proof that you have the money for the down payment and the closing costs
- Information about your other assets, such as a car or cottage
- Information about your debts or financial obligations
For more information on what is needed to be provided, the Government of Canada addresses the matter in a comprehensive manner.
Why is it essential to have a mortgage pre-approval letter before starting the property search?
1. Shop for properties in your price range
Knowing your borrowing capacity, you will only visit properties you can afford. It is all the more practical to know your buying power in a situation of overbidding, as it is the case for many properties in 2022.
2. Save time during the purchasing process
Visiting only properties that are within your budget will obviously save you time. Also, the approval stage has already been completed for when you want to make a promise to purchase, which speeds up the process.
3. Avoid unpleasant surprises during a promise to purchase
After you have fallen in love with a property, you don't want to go all the way to the promise to purchase stage and be denied your request. With a mortgage pre-approval, you have already defined beforehand that you can afford to buy the property that charmed you.
4. Be prioritized as a pre-approved buyer over an unapproved buyer
A mortgage pre-approval letter shows you are serious about your approach to the seller and can therefore give you a head start over unapproved buyers.
5. Being able to make a promise to purchase quickly (essential especially in the context of multi-offers!)
As mentioned earlier, in the current real estate environment, buyers are in fierce competition for the same property. It is therefore essential to have been pre-approved in order to be able to make a promise to purchase quickly after visiting.
Elements to consider
- To establish your budget, estimate the other costs related to the purchase of a property such as closing costs, moving costs or routine maintenance.
- It might sound obvious, but pre-approval doesn't mean you have to buy a home at the maximum pre-approved price. As stated, this is the maximum price. By evaluating other costs, your daily expenses and others, you will be able to estimate your own maximum price that you are willing to pay.
- Pre-approval does not guarantee approval of the mortgage loan. The lender will assess the property you want a loan for and may turn it down if it doesn't meet their standards (which may vary from lender to lender). If so, ask the lender what other options are available to you such as a lower mortgage amount, a higher rate, a larger down payment, etc.
If you don't know where to start or if you need assistance, speak to your Sutton real estate broker. They can answer your questions and easily put you in touch with a mortgage representative.