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Mortgage Pre-Approval: A Must for Every Home Buyer

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If you’re in the market for a mortgage, you probably know that lenders won’t just shower you with money when you show up at their office with a smile and a heart-warming story about how you’ve found the perfect home.

Nope, they want to know that if they give you a home loan, odds are good you’ll pay them back. And that’s where mortgage pre-approval comes in. Here’s everything you need to know about this crucial stage and how to ace it without a hitch.

What is mortgage pre-approval, anyway?

Mortgage pre-approval is that step in the process where a lender probes deep into your financial past, checking out your income, debts, credit score, and other factors that help it determine whether or not to give you a home loan—and how much money you stand to get. And that helps you set your sights on the right price range for a home. Finding out your price range before you start viewing Waterloo Region homes for sale can save you a lot of time and energy in the future.

Pre-approval vs. pre-qualification: What’s the difference?

Mortgage pre-qualification entails a basic overview of a borrower’s ability to get a loan. You provide a mortgage lender or mortgage broker with information—about your income, assets, debts, and credit—but you don’t need to produce any paperwork to back it up.

As such, pre-qualification is relatively easy and can be a fast way to get a ballpark figure of what you can afford. But it’s by no means a guarantee that you’ll actually get approved for the loan when you go to buy a home.

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Getting pre-approved, in contrast, is a more in-depth process that involves a lender running a credit check and verifying your income and assets. An underwriter does a preliminary review of your financial portfolio and, if all goes well, issues a written commitment for financing up to a certain loan amount; this commitment is good for up to 90 or 120 days. So as long as you find your dream house and officially apply for your loan approval in that time period, you’re good to go!

Your homebuying advantage

A letter of pre-approval from a mortgage lender is a little like to a VIP ticket straight into a home seller’s heart. Why? It’s proof you are both willing and able to purchase the home. Consequently, many sellers will accept an offer only from a buyer who has been pre-approved, which makes sense given that without pre-approval, there’s basically no guarantee whatsoever that the deal will go through.

What documentation you need

To get pre-approved, you’ll need to provide a mortgage lender with a good amount of paperwork. For the typical home buyer, this includes the following:

  • Pay stubs from the past 30 days showing your year-to-date income
    Two years of tax returns
    60 days or a quarterly statement of all of your asset accounts, which include your checking and savings, as well as any investment accounts such as CDs, IRAs, and other stocks or bonds
    Any other current real estate holdings
    Residential history for the past two years, including landlord contact information if you rented
    Proof of funds for the down payment, such as a bank account statement. If the cash is a gift – say from your parents, you need to provide a letter that clearly states that the money is a gift and not a loan.
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Don’t make this pre-approval mistake!

Each time you apply for a new credit account—including a home loan—you trigger a “hard inquiry” on your credit, which dings your credit score. Your score can drop as little as a few points or up to 14 points, depending on your credit history and the number of other loans or credit accounts you’ve applied for in the past 90 days.

Because hard inquiries hurt your credit score, you will want to avoid applying for pre-approval with multiple lenders; otherwise, your score could decline to the point where you get locked out of buying a home.

Still, it’s beneficial  to explore your options conversationally, since some lenders offer more competitive interest rates and better service than others. It’s for this reason working with a mortgage broker is often a better idea, as they can help you explore all your options more easily.

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