A pre-approval letter is a statement from a lender that you are qualified to service a specific amount of debt. It is important to distinguish between pre-qualification and pre-approval. Pre-qualification merely requires that you provide some general information about your income and debt levels to a broker or lender. There is little or no confirmation of the information. As a result, a pre-qualification can give you an idea of price range and mortgage payments but it carries little weight when it comes to negotiating.
Pre-approval is also provided by a broker or lender but unlike the pre-qualification letter, the information must be verified. You will be asked for documentation about your income, the source of your down payment, credit cards and outstanding loans.
It may be a good idea to find out if you have a good credit rating before approaching a lender especially if you have some doubts. Your local credit bureau should provide a credit rating report to you at no charge. If you don't have the time to go in person you can also obtain a free copy through the mail by calling:
Equifax at 1-800-465-7166 or
TransUnion Consumer Relations Centre at 1-800-663-9980.
Once you have a pre-approval letter you have several advantages. You will know your price range and be able to concentrate on finding the right home. Then once you have found it, you will almost certainly have leverage in negotiations. A seller who receives several bids in the same price range is looking for a buyer who can close the deal. The pre-approval letter accompanying your offer is a great advantage over the competition and both parties have greater peace of mind knowing that the other is committed to the deal.
Typically, arranging the loan is the most time consuming step in the process. With the loan pre-approval already arranged, it will take only a matter of days to complete the appraisal, inspection and closing.