As a homebuyer, you may have every reason to feel assured that you have the resources in place to make an offer this very day on a new home.
You earn a good income, you have stable credit, and frankly you can imagine no earthly reason why anything should stand in your way between you and that beautiful new home.
However, if you are going to need a mortgage to finance that new beauty then keep reading. Unwelcome surprises may be lurking around the corner and your best defense will be in your preparation.
Let’s take a look at 4 reasons why you should go the distance and secure formal mortgage preapproval before house hunting begins.
1. Preapproval Can Take Several Days
Despite the slick software and applications available now allowing mortgage brokers the ability to offer same-day mortgage approval, most reliable preapprovals take longer. Mortgage approval software can indeed provide same-day results, however these are not to be relied upon if your lender has not also asked you for a detailed list of supporting documents.
When you factor in the time required to gather the paperwork together that most lenders require, you are often looking at a 5 to 7 business day turnaround for proper preapproval on a mortgage.
What kind of documents can you start collecting in preparation? Lenders are looking for documents that can support your ability to pay a mortgage. These include pay statements, your most recent T4’s going back perhaps 3 years, your Notice of Assessment for about the same time period, the source of your down payment, and sometimes a letter of employment.
2. Know How Much You Can Spend
Knowing how much you can spend on a new home is essential. In the course of the preapproval process you may learn, to your relief, that you can handle more house than you thought.
It can also bring surprises. You may discover, for example, that the shiny new car in the driveway has resulted in your ratios being a little off-kilter and you are now approved for a smaller mortgage than you imagined.
Either way, it is important to know where you stand before you start to shop for a new home. It can help you to avoid the disappointment that comes with finding just the right property but not being in a position to buy it.
In addition to understanding your budget for the total cost of a home, securing your preapproval early will also provide insight into your interest rate and other mortgage terms.
Knowing your interest rate will a key factor in helping you determine your monthly or bi-weekly mortgage payments.
Remember also to account for property taxes in your new home budget. Some buyers opt to have this included in their mortgage payments which can impact how much you are ultimately spending in mortgage interest and, importantly, what your payments will be.
Read about other closing costs to consider.
3. To Identify Credit Concerns
If you are not in the habit of monitoring your credit on a regular basis, you may discover surprises lurking in the background. Credit issues can quickly fester, especially when you were not even aware they existed.
Sometimes a hit to a credit score can come in the form of fraud, or as a result of a divorce. Whatever the reason, finding out there is an issue with your credit when you’re in the middle of purchasing the home you just fell in love with is clearly not an ideal time.
Going through the mortgage preapproval process early can allow you to identify and resolve potential credit concerns before they are in a position of preventing you from buying the home of your dreams.
4. To Clarify Financing Condition Options
Mortgage lenders will tell you that even when you have a secured preapproval in hand, it is still a good idea to include a financing condition in an offer to purchase. The condition is designed to protect you in case something goes wrong when the lender reviews the home you plan to buy.
Including a financing condition essentially means that your offer will not be firm and binding until you can get final mortgage sign-off from your bank. This is the final step that happens after you have already been preapproved and have identified the home you plan to buy.
Buyers would simply provide their lender with a copy of the Agreement of Purchase and Sale, and the bank then verifies that they are prepared to offer you a mortgage in the agreed-upon amount and terms for this specific property.
Some homebuyers opt out of including a financing condition in the current seller’s market, fearing that it may affect their chances of buying the home. And this may in fact be true.
However, another course of action may be to include the condition but simply reduce the time needed to satisfy it. Instead of the usual 3-5 days perhaps you could secure approval in 24 hours. Talk to your lender or mortgage broker to see what your options are for timeline.
Remember to get strategic advice on the offer process from your REALTOR as well.
A final word of caution. Once you have bought the fabulous new home and you are getting ready to move, do everything you can to avoid big purchases until after closing day.
Whether it’s new living room furniture, an expanded line of credit, or taking advantage of an early lease renewal on the car, you may want to play it safe and wait until after you have the keys to your new home in your hand.
Any big credit purchase between the time you firm up your purchase and the day of closing has the potential to play havoc with your debt ratio and as a result, could influence your lender’s willingness to provide you with a mortgage.***
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