Getting started on your journey to home ownership can be confusing when there are so many opinion on which step to take first. It’s our opinion that pre-approval is the easiest and most helpful first step because it gives you a good idea of how to narrow your search.

What is a pre-approval?

A mortgage pre-approval application will give you an idea about which lenders are likely to give you a mortgage and how much they are willing to loan you. You can submit this application quite quickly with a mortgage broker, usually in person but also often online. The broker will take your financial information and submit it to multiple lenders at once. Once the lenders have sent back their approvals your broker will give you a report with a rundown on which lenders will work with you, how much they are willing to loan, and at what interest rate.

Submitting your application through a mortgage broker has the benefit of doing the process once and getting several responses in return (as opposed to going to multiple lenders and doing the process over and over.) Remember that each time you submit a pre-approval application there will be a small hit to your credit. Doing this over and over within a small time frame can hurt your credit significantly, to the point that you may no longer be able to get approved by most lenders. Submitting your application through a broker is beneficial because it only counts as one hit to your credit. And, there is is no requirement to continue with a purchase.

If you ARE ready to go house hunting your broker will secure your interest rate for a short-term period (90-120 days) so that you won’t have to worry about fluctuating rates while you find the property you want to buy. You’ll also be able to give your pre-approval information to your realtor who will then narrow your search to the parameters of your lending limit. Sellers will know you’re a serious buyer because you’ll already be in a position to make an offer. Pre-approval applications can take a few days to process, which means that if you’re not ready to buy when you find the house you want, it may sell to someone else while you’re sitting around waiting for the pre-approval. Don’t let that happen to you. Get the pre-approval first.

How the pre-approval is calculated

Your mortgage broker will compile your employment, credit, and asset information and with your approval, pull your credit score. With this information combined he or she will send it to various mortgage lenders who will then approve you for specific lending rates and maximum lending amounts. If you have a good income-to-debt ratio or if you have a large down payment, lenders will likely make you a better offer.

How to use your pre-approval

The most a lender will agree to lend you is called your maximum affordability or your maximum lending amount. With this limit in mind you’ll have a better scope on what kind of properties you could potentially afford. Keep in mind that you do not have to use the maximum lending amount. It is important to be honest with yourself about your financial habits and to create a budget that you know will work for you.

A pre-approval is not a sure thing

Just because a lender may pre-approve you for a mortgage does not mean they will seal the deal when you submit your mortgage application. Lenders may choose not to approve your mortgage application for one of  a few reasons. Most often the reason is that the financial information you provided on your mortgage application was not the same as the information you provided on your pre-approval. You may have lost your job or started a new one, leading to a change in income. You may have made a large new purchase and thereby altered your debt levels. It’s important to not to make any major changes to your financial profile between your pre-approval application and your mortgage application.

Another less likely reason a lender may refuse to approve your mortgage application is if the property you want to buy does not qualify, such as older homes that are not up to code or homes that are priced well above their value.

It’s plain to see that a mortgage pre-approval is an excellent and useful first step on the path to finding your first home! Contact us today to find out what you may qualify for or use our quick and free online pre-approval application below.

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