When the home hunting bug strikes, the first thing most would-be home buyers do is look up online real estate listings in their ideal neighbourhood. After getting over the initial sticker shock of home prices and adjusting your search criteria to find homes you think are in your budget, the next step is to contact a real estate agent and set up viewings—right?
Wrong! There’s one crucial step missing in this scenario—and that’s getting a mortgage pre-approval.
What is a Mortgage Pre-Approval?
A mortgage pre-approval is when a lender has reviewed your finances and—based on the information you provided about your assets, income, down payment amount and debt service ratios—has decided that you qualify for a specific purchase price and mortgage amount at a certain mortgage interest rate.
Getting a mortgage pre-approval is a key step to take before you contact a real estate agent and begin viewing homes because it will give you a realistic idea of how much home you can afford.
Obtaining a mortgage pre-approval will also raise any potential red flags before you fall in love with your dream home. For example, if there’s an issue with your credit report, wouldn’t you rather find out before you start house hunting seriously? Getting a pre-approval ahead of time allows you to sort out any mistakes or misunderstandings without offer deadlines or bidding wars hanging over your head.
A Pre-Approval Doesn’t Lock You In
Getting a mortgage pre-approval doesn’t mean you’re required to stick with that lender. A pre-approval does not come with any conditions, and you should feel free to shop around at multiple lenders to see if you can secure a lower mortgage rate. If you plan to go this route, consider using a mortgage broker who can shop your information around to multiple lenders and secure the best rate.
A Rate Hold Is Your Next Step
Once you receive your pre-approval, you should ask for a rate hold. A rate hold locks in the lender’s interest rate. If rates rise, you’re still entitled to that low rate if it’s a fixed-rate mortgage. If you get pre-approved for a variable-rate mortgage, the discount to the prime rate remains the same.
If rates drop, you can renegotiate and obtain a lower rate. Rate holds last for various lengths of time, usually between 30 and 120 days. If you can, get a rate hold for 120 days. That will give you enough time to start home hunting, submit your offer, and close on a home before the rate hold expires.
If you start house hunting and determine that you aren’t ready to buy a home yet or if you can’t find the home of your dreams, you aren’t required to use your mortgage pre-approval. A mortgage pre-approval is different from a formal mortgage application and since it doesn’t guarantee you a mortgage, you have no obligation to use it.
If you’re curious about obtaining a mortgage pre-approval, but you aren’t ready to contact a lender or mortgage broker just yet, you can use a mortgage approval calculator for some quick insight into how much home you can afford.
Ratehub.ca is a website that compares mortgage rates, credit cards, high-interest savings accounts, chequing accounts, and insurance with the goal to empower Canadians to search smarter and save money.