Purchasing a first home, or a new home, can be an exciting adventure. It can also be a daunting task if you don’t know where to start. With so many properties on the market at any given point in time, zeroing in on the perfect home can be a time-consuming and frustrating task.
The secret to finding your new home quickly with the least amount of effort and hassle is to narrow your search parameters from the get go. Most certainly, your main criteria will be... price. That’s where a pre-approved mortgage may help.
What Pre-Approval Means
When you decide to apply for a pre-approved mortgage, you are basically applying for a mortgage before you have found a home to purchase. You will need to supply all of the usual personal and financial details that are necessary for a regular mortgage. This may include proof of employment, salary, credit history, a list of assets and liabilities, etc.
Although you will not actually get the mortgage until after you have identified a property that you wish to purchase and that the lender has inspected and approved, pre-approval gives you a clear idea of how much you can realistically afford to borrow.
Note that pre-approval does not mean that the lender will automatically grant you a mortgage for any property that is below the approved amount. The lender also has to approve the property once you have identified it. They may use many different criterion to do so based on the property location, the uniqueness of the property, and its complexity (as in the case of a part commercial part residential building). Primarily though, they want to ensure that the appraised marketable value of the property fits within their loan-to-value ratio in case of default. The loan-to-value ratio is the percentage of the appraised value (not the purchase price) that the amount loaned represents.
The rate of the pre-approved mortgage is usually guaranteed for a brief period such as 60, 90, or 120 days, depending on the lender. If rates go up in that period, you will have access to the lower pre-approved rate as long as you secure an agreement for purchase within the specified time period. On the other hand, if rates go down you will usually benefit from the lower rate.
Where to Get a Pre-Approved Mortgage
Most local banks and credit unions offer pre-approved mortgages. However, you can also try a mortgage broker. In my experience, mortgage brokers can often offer more competitive rates and terms than banks. They can do this because they can access funds from several sources, with often dozens of financial institutions at their disposal bidding for your business.
The other advantage of using a mortgage broker is that you get the opportunity to have them shop for the best rate/terms on your behalf, but they only do one credit check on your personal credit history profile. This helps maintain a better credit score than if you visited multiple financial institutions yourself where each would do their own credit check.
How You Benefit
Going house hunting armed with a pre-approved mortgage in hand provides many benefits:
- Focus - Heading out shopping with an objective assessment of how much house you can afford, you can target your search accordingly. You are less likely to waste time looking at less costly homes that do not meet your needs, or, be distracted by more expensive ones that you cannot afford.
- Stronger Offer - Placing an offer with a pre-approved mortgage in hand sends a strong signal to the vendor that you have done your homework and are making a serious offer. This is critical in cases when a vendor has to choose between 2 competing offers on his property. It can also reassure a vendor when an offer is made below asking price that he won’t be wasting his time with your offer if he decides to accept a lower price.
- Peace of Mind - Most importantly, you can feel confident that you are making an informed decision before placing the offer, bringing tremendous peace of mind.
- Better Service - Though it is sad that this is sometimes the case, you may also get more proactive assistance from some real estate agents in helping you search for and purchase a property. They will assume that their time will not be wasted by showing you, and making offers on, homes that you can’t afford, and will consider you a serious buyer because of the extra legwork you have already done.
If you are starting your search for a new home, do yourself a favour and get a pre-approved mortgage. Your adventure will be a more hassle-free one and you might actually enjoy the process more.
By Mike Lafontaine
Bilingual Real Estate Sales Representative
Cell 902-393-8100 | firstname.lastname@example.org | www.mikelafontaine.ca
Century 21 Colonial Realty Inc. | 111 St. Peter's Road, Charlottetown, PE C1A 5P1