Mortgage Pre-Approvals: What Are They, and Do You Need One?
There’s a common misconception among some homebuyers that if you’ve got a pre-approval, your mortgage is basically guaranteed. But this isn’t always the case. Having a pre-approval doesn’t automatically mean the lender will fund your mortgage. Below, we’ll explain what a mortgage pre-approval is and whether it’s worth getting one. A mortgage pre-approval is a conditional approval granted by a lender based on a preliminary review of your financial situation and creditworthiness. While this preliminary approval usually requires a credit check, information about your debts and income are based on details you provide to your broker, which are then shared with the lender. A pre-approval is often based on that information alone, without the lender verifying the documents or knowing which property you’re going to buy. For these reasons, a pre-approval isn’t binding until a lender has a chance to do its own due diligence and fully verify your financial information. It will also have to review details of the property you plan to purchase, which can include requiring an appraisal and/or inspection. Of course, as your broker, I can give you a much better understanding of what will and won’t be accepted. Pros and cons of a pre-approval
Pro: They let you know roughly how much you can qualify for based on the preliminary financial information you provide to the lender.
Con: Not all lenders offer pre-approvals, which could limit rate options somewhat for those wanting a pre-approval.
Pro: The process is generally quick and can often be performed online.
Con: Some pre-approvals can come at a cost, potentially adding anywhere from 15 to 25 bps to your rate. Lenders that offer pre-approvals are hedging their offers and must honour the rate they quote if they go forward with funding the mortgage. This can result in potentially higher funding costs, which is why many rates with pre-approvals are priced at a slight premium.
Pro: Peace of mind while house-hunting. Having a pre-approval in hand can give you greater confidence when shopping for your house, as you can set an appropriate budget based on the mortgage you can qualify for.
Pro: Lock in a rate. If you’re concerned about mortgage rates rising during the home-buying process, getting a pre-approval is a good way to lock in a rate, which lenders will typically hold for up to 90 or 120 days.
Should you get a pre-approval? Pre-approvals are often a good starting point when shopping for a mortgage. Let’s talk about your unique situation and whether a pre-approval is right for you. Please don't hesitate to call or reach out to us if you have any questions!