When you’re thinking about buying a new home, the mortgage amount will be a big part of your decision. For a pre-approval, your bank will look at your credit score, your income, and your monthly debts to determine how much they’re willing to lend you. A mortgage pre-approval isn’t a commitment, but it will help you gain a better understanding of how much you can afford.
We’ve put together a list of the top reasons why you should apply for pre-approval when starting your home search.
1. Knowing How the Bank Sees You
It’s important to get a sense of what a bank will lend you. You may think you’re doing well financially because you always have enough money to pay the bills, but if you’ve never taken out a loan or gotten a credit card, your credit score may be too low to qualify. During the pre-approval process, you may also realize the bank doesn’t count all of your income because a large portion of it comes from bonuses or overtime pay. These things can greatly affect how much money the bank is willing to lend you.
When you apply, you have to provide the bank with financial documents. They’ll get an accurate look at your financial picture and tell you how much money they’ll loan and what interest rate you’re likely to pay.
2. Setting a Budget for Your New Home
Doing a pre-approval will help give you a better understanding of how much the bank is willing to loan you for a home. Rather than a set amount, the bank typically tells you a maximum monthly payment they’ll allow. They do this because property taxes, homeowner’s insurance, and mortgage insurance can fluctuate, and these amounts are included in the monthly payment.
Of course, you shouldn’t use the bank’s maximum monthly payment alone. You’ll also need to determine whether their limit is affordable for your lifestyle given all of your other monthly commitments. Sometimes, it’s smarter to set a lower budget for yourself so you can enjoy things like taking a vacation and other hobbies.
3. Learning You Need to Improve Your Credit
As we mentioned, with the pre-approval you’ll learn your credit score. You may see your score is just a few points away from a better credit tier and a lower interest rate. In any case, you can use the time in between the pre-approval and actual purchase date to improve. Make sure to pay your bills on time and pay down any debt you may have.
4. Playing with Actual Figures
You’ve probably already started using mortgage calculators to play around with the figures. These tools can help you get a sense of how much different homes cost on a monthly basis. You can also see how a higher or lower down payment affects your monthly payment. If you’ve been using the advertised rates, you may be surprised by how much the actual rate can change the monthly payment. It’s best to base your home budget around these numbers to get the most accurate costs.
5. Making Your Purchase Easier
Getting a mortgage isn’t necessarily difficult, but there’s a lot of paperwork involved. A missing pay stub or tax form can slow down the process. When you get pre-approved, though, you’re starting the process early. The bank will already have your important information on file when you apply for the mortgage. A pre-approval also significantly reduces the chance that your financing will fall through at the last minute. As long as there hasn’t been a dramatic change to your financial situation, you should be fine.
6. Locking in Rates
With a mortgage pre-approval, you’re usually able to lock in rates at the current level. Edmonton mortgage rates can constantly fluctuate. Locking in a rate ensures you’re getting the best deal. If rates drop by the time you’re ready to purchase a home, you’ll be able to get the lowest rate. If they raise, you’ll still get to keep the rate you did your pre-approval at. There’s no risk involved.
7. There’s No Commitment
Getting pre-approved for a mortgage isn’t a commitment. You don’t have to use the bank that pre-approved you, and you’re not locking yourself into a mortgage payment. You’re just getting a sense of what you can purchase. If you’re starting to get serious about buying a home, there’s no reason not to get pre-approved for a mortgage.
Your mortgage pre-approval gives you a clear picture of what you can afford. Come check out StreetSide’s affordable new homes. You’ll be surprised by how far your money can go.