What You Need to Know for Your Mortgage Preapproval
You may have heard about needing to get a mortgage preapproval but aren’t quite clear on what exactly that means.
This is an important step for first-time homebuyers to be aware of and prepare for, as a preapproval could be the difference between winning the offer on your dream house and not be considered a competitive candidate. In this guide, you’ll learn what mortgage preapproval is, the types of preapprovals you can qualify for, and the steps to getting preapproved.
What is Mortgage Preapproval?
Mortgage preapproval is how a lender determines if you qualify for a loan and how much money you can borrow. This includes a review of your income, assets, and credit score so a lender can determine which types of loans you could be approved for, how much you can borrow, and what your interest rate might be.
If all goes well, you’ll receive a preapproval letter from the lender at the end of this process that provides the maximum amount of money you can borrow based on the loan program you apply for. Remember that you don’t have to buy a house at the top of your preapproval range – be conscious of your budget and stick with a cost you’re comfortable with.
Why Mortgage Preapproval is Important
A preapproval letter shows a seller that you’re a serious buyer and solid enough financially to purchase their home without hassle. In some cases, a preapproval letter can even set you apart and boost your offer to the top. However, in a hot market or highly desirable neighborhood, this letter may actually be required before you submit an offer to help weed out less-qualified candidates. So yes…mortgage preapproval is incredibly important.
Types of Mortgage Preapprovals
These are the most common mortgage options for first-time Canadian homebuyers:
- Conventional Mortgage
This is the most common mortgage preference for homebuyers that have 20% or more to put toward the down payment for a house.
- High-Ratio Mortgage
For new homeowners looking to make a down payment of less than 20%, a high-ratio mortgage is the best option. This means that the property’s loan-to-value would most likely be over 80 percent, which is why you’d be required to get mortgage default insurance.
- Open/Closed Mortgage
An open mortgage gives you the chance to pay off the mortgage in full at any time without facing a penalty. A closed mortgage, on the other hand, is a mortgage where you’re restricted by the amount you’re able to pay towards the mortgage at a time.
- Fixed Rate Mortgage
With a fixed rate mortgage, your mortgage rate will stay the same throughout your mortgage term, which can be for up to five years at a time.
- Variable Rate Mortgage
This option carries a bit of risk, but it’s also a high reward. A variable mortgage rate can change during a mortgage term based on if your lender updates its prime rate. The rate on a variable rate mortgage is typically lower than a fixed rate, but there’s always the potential for an increase.
Steps to Getting Preapproved
A smooth preapproval process requires preparation. Follow this handy Mortgage Documentation Checklist (link to article) to get all your paperwork in order. Once that’s done, you’ll be able to submit it via an online submission form with the bank or lender you’re working with. The lender will then check your credit history and ensure that you’re a trusted borrower candidate.
Once you’ve submitted all your information (such as your tax forms, pay stubs, letter of employment, and bank statements), it typically takes a few days to hear back on whether you’ve been pre-approved.
Once you get confirmation that you’ve been preapproved, be sure to ask how long your pre-approval is good for. If they expire within 1-3 months, you’ll need to go through the submission process again.
Mortgage Broker vs. Bank for Loan Preapprovals
Just like with your mortgage type, you have options when it comes to seeking your loan preapproval. Both a mortgage broker and a bank can provide this service – it’s simply a matter of which one is a better fit for you.
Preapproval with a Bank
When you think of applying for a loan, your bank is probably the first place that comes to mind. And yes, your bank offers convenience, a sense of trust with people, and a place you’re familiar with, and can even provide perks if you combine your banking and mortgage services.
However, keep in mind that banks prefer to look for lower-risk borrowers with the best credit scores. They may provide great rates, but they also tend to have the strictest policies and may not accept borrowers with low credit scores or less-than-great credit history.
Preapproval with a Mortgage Broker
A mortgage broker is a licensed professional who can secure a mortgage for clients looking to get a home loan. They act as the intermediary between you and your potential lenders. This option provides you with access to a wider variety of lenders and a higher chance of getting a mortgage, as they’re typically willing to take on a little more risk. This is a great option for first-time homebuyers who are working on building their credit score.
Bottom Line: Preapprovals Help You Shine
Yes, it’s a lot of paperwork, but mortgage preapproval is a fantastic way to set yourself up for success in your future homebuying endeavors. Take the time to get your documentation in order and find a lender you trust to help you with this process. This is the launching point for purchasing – and winning – your first home.