There’s nothing more disappointing than falling in love with a home only to realize it’s out of your reach. Getting prequalified for a mortgage can give you a better idea of the price range of homes you should be looking at, but once it’s time to get serious you’ll want a mortgage loan preapproval letter.
What’s the difference, you ask? In this post, you’ll learn how to use prequalification and why a preapproval letter can be a great asset in the search for your next home.
What’s the difference between mortgage prequalification and preapproval?
Prequalification requires that you provide some general information about your income and debt levels to a broker or lender. There is little or no confirmation of the information. As a result, a prequalification can give you an idea of your ideal price range and mortgage payments, but it carries little weight when it comes to negotiating.
A mortgage preapproval letter, on the other hand, is a statement from a lender that you are qualified to service a specific amount of debt.
If you are bidding on your dream home, being preapproved can be a great advantage over competing bids. It can also let you know exactly where your price ceiling is.
Preapproval is also provided by a broker or lender but unlike the prequalification letter, the information must be verified.
How do you get preapproved for a mortgage?
In the process of mortgage preapproval, you will be asked for documentation about your income, the source of your down payment, credit cards and outstanding loans.
It may be a good idea to find out if you have a good credit rating before approaching a lender, especially if you have any doubts.
You can buy your credit report online or obtain a free copy through the mail by calling:
- Equifax at 1-800-465-7166,
- or TransUnions Consumer Relations Centre at 1-800-663-9980.
You must fax two pieces of government-issued identification, your social insurance number, date of birth, current address as well as any address you have had in the last five years, and the name and number of your current employer.
Expect to wait at least ten days to receive your report by mail. With your report in hand, you’ll know if there are any roadblocks in the way of your mortgage and can present that report to potential lenders. Be aware, however, that lending institutions have access to information on the number of credit checks you or other lenders have requested.
If your credit rating is acceptable, the lender should be able to provide you with a loan rate, lock in the loan if you wish, and provide a closing statement which outlines the cost of your loan and how much you will need for a down-payment. If your credit rating is less than stellar, you may use the services of a mortgage broker rather than a direct lender. A mortgage broker will search out a variety of lenders to find one who can accommodate your loan.
Why does mortgage preapproval matter?
Your preapproval letter offers several advantages. You will know your price range and be able to concentrate on finding the right home. Once you’ve found it, you will almost certainly have leverage in negotiations.
A seller who receives several bids in the same price range is looking for a buyer who can close the deal. The preapproval letter accompanying your offer is a great advantage over the competition (i.e. all the other people admiring the beautiful hardwood floors and the large backyard!). Both parties have greater peace of mind knowing that the other is committed to the deal.
Saving time is the great advantage of being preapproved. If the seller is in a hurry to move or has already moved because of a new job in another city, for example, your offer will look attractive since you will be able to close much faster. Typically, arranging a loan is the most time-consuming step in the process. With the loan preapproval already arranged, it will take only a matter of days to complete the appraisal, inspection, and closing.
Mortgage Preapprovals: The Fine Print
Remember that a mortgage preapproval letter is time-sensitive and typically expires within 60-90 days (a 90-day period is most common and most beneficial to the consumer).
It is important to note that the entire transaction must take place within the given time frame in order to receive the preapproval rate. There are three steps in the process: pre-approval, application, and funding. The application takes place when the prospective homeowner finds a property and applies to receive the mortgage. Funding is the actual arrangement of the mortgage and payment to the other party by your bank.
Since it can be difficult to find the home you want, make the application and arrange the funding within the pre-approval period, lenders use a few methods of calculating interest rates which actually benefit consumers.
- If the 90 day period has expired, a customer is not eligible to receive the pre-approval rate, however, if the application took place within the 90 day period, he or she would receive the lower rate of either the funding date or application date.
- If the closing date extends beyond 90 days from the application date, the customer would then receive the lower rate of the funding date or the 90th day prior.
It is beneficial to be able to complete the entire transaction within the pre-approval time frame when interest rates are rising. If for example, rates are 7% on the day of pre-approval, 7.2% on the application date and 7.5% on the funding date, you would receive your mortgage at 7%.
Also, keep in mind that the preapproval is not binding on the lender; it is subject to the appraisal of the house you wish to purchase, and also to your financial situation remaining unchanged throughout the duration of the preapproval period.
Overall, preapproval is a great benefit to consumers as it saves time, worry, and money!
Ready to start your property search?
With information contributed by Joyce Byrne.
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