Buying a home involves several important steps, one of which is mortgage pre-approval. Although it is sometimes overlooked, this step is crucial in any property acquisition process.
While not mandatory, mortgage pre-approval is highly recommended, whether you're a first-time buyer or an experienced homeowner. This process offers several advantages that should not be overlooked!
Why undergo the pre-approval process?
In any real estate transaction, preparation is key to success. A well-planned approach will save you both time and money. And what better way to prepare than by getting pre-approved for your mortgage?
This step is typically completed before you start searching for your new home. Its main purpose is to streamline your loan application and guide your property search. In fact, many real estate agents require mortgage pre-approval before showing you homes, ensuring you have the financial capacity to complete your purchase.
Mortgage pre-approval essentially helps you identify which banks are willing to support your purchase and the amount of mortgage you could be eligible for.
However, be cautious not to confuse mortgage pre-approval with mortgage pre-qualification. While these terms are related, they serve different purposes. This article from the Autorité des marchés financiers (AMF) will help you understand what distinguishes them.
1. It allows you to know your exact borrowing capacity
During the mortgage pre-approval process, the lender specifies the maximum amount it is willing to lend you for the purchase of your property, along with the conditions under which the loan would be granted. This gives you a clear understanding of your borrowing limit based on your current financial situation, even before you start your property search.
However, keep in mind that you are not obligated to borrow the maximum amount offered. In fact, it may be more advantageous to request a smaller loan. Regardless, always ensure that you stay within your budget and repayment capacity to ensure your purchase is made under the best possible conditions.
A borrowing capacity that could change...
It's important to note that the maximum amount specified in your mortgage pre-approval may change if your financial situation shifts between the time of your application and when you take out the loan. The pre-approved amount is not set in stone.
In fact, under certain circumstances, the bank that pre-approved your loan may need to reassess your situation and reduce the amount it is willing to lend you. This could happen if:
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You took out another loan.
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You agreed to pay more for the house than its market value.
In some cases, the financial institution might even refuse to grant you the loan altogether.
2. It simplifies your property search
Knowing your maximum borrowing capacity in advance helps you focus your search on properties that are both affordable and within your budget. This prevents you from wasting time visiting homes that are too expensive and allows you to concentrate on the right options.
Once you find the home of your dreams, you'll also have the assurance that you have the financial means to purchase it, assuming, of course, that your financial situation has not changed.
3. It gives you more credibility to the seller
Are there other potential buyers interested in the same property? Standing out in a competitive market can be challenging. However, with a mortgage pre-approval in hand, you significantly increase your chances of standing out from the crowd.
Having completed the pre-approval process signals to the seller and all parties involved in the transaction that you are a serious buyer with the financial means to purchase the property. In the event the seller receives several offers, yours will likely carry more weight if it is accompanied by a mortgage pre-approval.
4. It ensures you get the best interest rate
The mortgage rate can significantly affect the amount of interest you pay over the life of your loan, which is why buyers always strive to secure the best possible rate.
A mortgage pre-approval can help in this regard, as most lenders "lock in" your rate for a certain period (typically 30 to 120 days). If mortgage rates rise by the time you're ready to purchase, you'll still benefit from the rate guaranteed by your pre-approval. This can be a considerable advantage!
On the other hand, if rates fall between the time of your pre-approval and the actual transaction, you can take advantage of the lower rate. You're not obligated to accept the pre-approved mortgage rate, so it's a win-win situation!
5. It allows you to plan your mortgage payments
Knowing in advance the maximum amount you can borrow lets you calculate the potential mortgage payments if you decide to borrow the full amount available.
With this information, you can explore different repayment scenarios to determine:
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Whether the payment amount (monthly, weekly, or biweekly) is affordable for you.
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If you should borrow less.
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If you should increase your down payment.
In short, performing a few preventive calculations will help you develop the best repayment strategy for your situation.
Using a mortgage broker: an added advantage!
As we've discussed, obtaining a mortgage pre-approval is a crucial step in any real estate purchase, offering numerous financial benefits.
However, it's important to know that applying for pre-approval on your own could potentially impact your credit report negatively. The solution? Working with a mortgage broker!
A mortgage broker is the best way to maximize the advantages of pre-approval. Beyond this step, a broker will guide you in choosing the right mortgage, negotiate the terms on your behalf, and assist you when it comes time to renew your loan.
And if you're still not convinced of the benefits of working with a broker, keep in mind that their services are free and there’s no obligation. So, what are you waiting for?
Ready to get your mortgage pre-approval? Just follow these few steps.
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