What does being pre-qualified or pre-approved for a mortgage mean to a buyer?
There are differences between being pre-qualified or pre-approved for a mortgage and it can affect your ability as a home buyer, as well as the transaction itself.
Pre-qualifying for a mortgage typically doesn’t include an analysis of your credit history or an in-depth look at your ability to buy a home. You can actually pre-qualify yourself for a mortgage by taking a general look at your income and expenses and plug them in to a total debt-to-income ratio formula. Here is a link to a calculator to help you: http://www.cmhc-schl.gc.ca/en/co/buho/buho_007.cfm.
Assuming that all of the information you used was accurate, this will help you establish your potential range of affordability. Please understand that this exercise will not establish an interest rate for you, and that factor and others affect the monthly payments a lender will allow you to make.
Most Realtors, whether they are representing the buyer or the seller, prefer and recommend working with pre-approved buyers. Being pre-approved normally means a lender has undertaken an extensive financial background check which includes a review of your credit history, previous tax returns and verifying your employment. If you have any uncertainty about the status of your credit, I recommend that before applying for a pre-approval you verify it at: www.equifax.ca. Sometimes credit reports are inaccurate, or they give a misleading picture of past credit problems that have since been resolved.
Although a pre-approval still isn’t a guarantee that the lender will approve your loan, there is less likelihood of rejection. A lender will only issue you a mortgage commitment after approval of you, and the house itself based on a title search, appraisal, insurability and other guidelines. Appraisers are like the banks eyes. If you are planning on making an offer, make sure to allow plenty of time for the mortgage lender.
If you’re pre-approved, it is a good idea to get a letter that states such and how long it is valid for thereafter. Obtaining a pre-approved mortgage amount is a competitive advantage because it signifies you are one step closer to a mortgage commitment from a lender, and this helps to assure a seller that you are a serious buyer. It is not uncommon for a seller to even accept a slightly lower offer from a fully pre-approved buyer.
As a buyer with a pre-approval you can proceed with a great deal of confidence providing that no adverse changes are made in your financial position, including co-signing, that could affect your credit negatively. There is nothing worse than a buyer’s offer falling through due to failure of mortgage financing, and it is more common than people realize.
Initially the terminology Pre-Qualified and Pre-Approved can be confusing. Since meanings can differ in different regions, ask your broker or lender to explain the terms associated with their mortgage products, services and the approval process.
I recommend that buyers use an independent mortgage broker (Vs. a captive broker) who will shop around lenders to get you the best rate and terms possible. Independent mortgage brokers can show you how to buy with no money down, legally and easily, and help you sort through the bewildering array of mortgage options including extended amortizations.
An independent mortgage broker can often save you between 1% and 1.5% off the stated mortgage rate. This service is free, there is no obligaton and it would be my pleasure to help you find an independent mortgage broker for a consultation.
BTW, I do not accept referral fees if you are looking for an introduction to a mortgage broker.