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Get the Horse Before the Cart - Why a Pre-Approval Should Be the First Step for Buyers

Prospective homeowners may get excited by the market or the prospect of home ownership and decide that now is the right time to look into buying a home...but sometimes they get the cart before the horse and start house shopping before the have been pre-approved for a mortgage. The pre-approval process is a way for buyers to get insight on potential obstacles and learn more about what mortgage lenders want from applicants. Preparing for a mortgage loan in advance will help avoid surprises and speed a buyer's final mortgage approval when the right house is found. You'll also be taken more seriously.

Knowing Where you Stand

Before running out to look at houses, prospective buyers need to know any potential hurdles they may need to overcome when it comes time for a mortgage approval. Will poor credit make it difficult to find a lender or increase interest rates? Would it help to minimize outstanding debt before applying for a loan? Such obstacles are generally identified during the pre-approval process.

What Does Pre-Approval Mean for Buyers?

First-time buyers should look at the pre-approval process as an initial review of how much home one can afford and the level of risk a buyer will bring to a mortgage lender. As it pertains to risk, the pre-approval process will review a potential buyer’s:

  • Credit score
  • Debt level
  • Employment status
  • Income

It makes sense for some buyers to order a copy of a credit report well in advance to address any errors or discrepancies and pay down debt to potentially qualify for better interest rates. In addition, going through the pre-approval process will help an individual get a realistic assessment of the amount of a potential home mortgage that they can hope to qualify for. Why start looking at homes outside of a realistic price range? Know which homes are within a set budget before going house hunting.

The pre-approval process can let the prospective buyer know the maximum amount a potential lender would be willing to lend to a qualified buyer and the interest rate of the loan. Buyers can learn the amount of their estimated mortgage payments and depending on the mortgage lender, lock in an interest rate for up to 120 days. Home buyers will need to set aside funds for their down payment  and closing costs before making an offer. And then there are moving and future maintenance costs that need to be factored in. There is much to be aware of when budgeting and financing the purchase of a home, and buyers don't want to make the mistake of not considering this budget in advance. The pre-approval process gets buyers on the right track and attunes them to the priorities of lenders and sellers.

Do You Want to Get Ahead of Other Prospective Buyers?

Time is valuable. Real estate agents and home sellers take a buyer and their offer more seriously when they have already been pre-approved. As a successful real estate agent, I can affirm pre-approved buyers will almost always get priority on their offers when compared to offers from buyers who have yet to go through the pre-approval process. And think about it - why would a seller or their real estate agent want to waste their time negotiating with a buyer and taking their home off the market only to find out a buyer does not qualify for a loan? And why would a buyer have their own real estate agent write an offer in the first place if this important step has been omitted? In my opinion, a pre-approval is time spent wisely.

A Pre-Approval is not a Guarantee

It is important to note that a pre-approval does not guarantee a final mortgage approval. In a "live" mortgage approval, the lender will also want to evaluate the property being purchased and confirm the borrower's credentials are as stated and have not changed, so it is possible for someone who has been pre-approved to be turned down after applying for a mortgage loan. However, a pre-approval does improve a prospective buyer's mortgage approval chances immensely and shows their intent to be taken seriously to real estate agents and sellers. Many of those who go through the pre-approval process will also get a final approval much faster, as mortgage support documents have already been collected and reviewed in advance of making an offer and for the underwriting process.

Know Your Next Steps to Homeownership

Prospective buyers may want to learn more about the mortgage loan process in advance of their search, and that's a really great idea for anyone looking to make this big decision to get a new home. Remember there are a variety of mortgage products made available to you through a mortgage broker, and - as a real estate agent - the better prepared you are, the better we can do our job as well. Contact a broker today to learn more about specific mortgage products. 

Justin Havre - Calgary Realtor, Guest Blogger

Topics: Pre-qualification, Negotiating, Pre-Approval, First Time Homebuyer