Buying a house of their own is a dream that most individuals cherish. They try to save up as much as possible to get a property that they can call their own. But let’s face it. In these times of rising real estate rates, it is almost impossible to buy a property solely with your savings. This is where mortgages come in.Mortgage loans are specialized credit facilities that can be taken out only when there is a property in the equation. A form of secured credit, mortgages use a piece of land or real estate as collateral. In case the borrower defaults, the lender can sell off the property to recover the amount.
What Is a Mortgage Pre Approval?
Before lending large sums of money, lenders would naturally want to verify the borrower’s background. Mortgage pre approval is the first step to getting a mortgage. It is not the guarantee of a loan but rather an offer of credit.
The lender states the loan amount they can extend, along with other necessary details. Financial information, like income, credit history, and assets of the applicant, is evaluated by the lender in great detail.
Once the lender has gauged your financial situation, they will estimate the loan amount that they can approve. Depending on your income, they will recommend a loan amount, a rate of interest, and your monthly installment.
A mortgage pre approval certificate is issued to you if the lender finds you credible enough, and it is valid for 60 to 90 days. The certificate proves that you can secure a loan, which encourages home sellers to take the deal forward with you.
Mortgage Pre-Qualification vs. Pre-Approval
There are two phrases commonly heard by people looking for mortgages: pre-qualification and pre-approval. Even though these might sound similar, they are not to be used interchangeably.
Mortgage pre-qualification does not even require a form to be filled out by the interested party. All details are provided to the lender, but no verification is carried out for pre-qualification. It is the very first step to securing a mortgage.
Creditors might choose to elaborate on the various options available to credit seekers, but nothing is confirmed at this stage.
The pre-approval is more involved and is one step closer to securing a loan. Lenders run a thorough check on the applicant’s finances, compare and verify all the information given on the forms. A certificate is then issued to the applicant, which is valid for up to 60 to 90 days.
This document clearly states the exact loan amount that the creditor will offer to the applicant, along with dividend rates and monthly installments, which assures home sellers of the genuine interest of the applicant in buying the house or real estate.
| Pre-qualification | Pre-approval |
| No need to fill out mortgage application | Filling mortgage application compulsory |
| Lenders offer an estimated loan amount | Lenders offer the specific loan amount |
| Finances are not reviewed | Finances are reviewed in-depth |
| No other information apart from loan amount estimate | Terms like down payment, and the interest rate provided |
What Factors Impact Your Mortgage Pre Approval?
Once an applicant is pre-approved, it is just a matter of time before the actual mortgage is approved. After all, the credit specifics like amount and interest rate are laid down before the applicant.
Since pre-approval is such an important aspect of the mortgage process, it is not to be taken lightly. Lenders will not approve mortgages if individuals don’t seem to own the resources to pay the loan back. There are numerous factors that impact mortgage pre approval, which have been discussed below in detail.
Credit Score
For people looking for mortgages and other credit facilities, it is impossible to go ahead without a decent credit score. It is a term that loan seekers often stumble upon. Simply put, a credit score is a score that reflects the creditworthiness of an individual. All the credit files and credit histories of an individual are analyzed in detail to assign the proper credit score.
Creditors compare your past debts, your timely repayments, and even your credit card usage.
Credit scores can range from 300 to 900. The higher the score, the higher the credibility of the person. There are two main credit-scoring agencies in Canada: TransUnion and Equifax.
Ideally, a credit score of more than 680 should be good enough for a mortgage pre approval. But nowadays, lenders look for credit scores as high as 750 or more to pre-approve the loan. Other perks that a high credit score provides are a lower rate of dividend and better terms for the loan.
Down Payment
When buying expensive assets like cars, lands, or buildings, people are required to place a down payment in the initial stages of the transactions. Thus, it is the minimum amount that the buyers have to pay to claim the asset as their own. Mortgages and other loans are taken out to finance the rest of the amount.
For example, you want to buy an apartment costing $500,000. So, you cannot take out a loan for the whole amount.
Generally, creditors require you to offer 20% of the total cost as deposit money. That would mean that you need to pay a minimum of $100,000 to buy the apartment legally. Keep in mind that the deposit money comes straight out of your pockets.
The more you deposit in the form of prepayment, the less you would be required to borrow as a mortgage. Thus, the credit term would be reduced as well. It is easier to be pre-approved if you put down a large binder amount, as it substantially reduces the risk that the lender would have to bear.
Debt Service Ratios
Suppose you are a kid whose monthly allowance is $500. But every month, you somehow spend more than your allowance and end up asking your parents for more. While this may work at home, this is not how the financial world operates.
To ensure that you are not in a similar situation, banks calculate your debt service ratio, which is the ratio between your due payments and your monthly income. What this means is that if you have other loan repayment obligations, the ratio will increase.
To complete the mortgage pre approval successfully, your debt service ratio should not be over 44%. But the figure may vary for every credit giver, so it is better to keep your debt service ratio as low as possible.
Your Employment History
Whenever creditors consider an application, one factor gets prominence over others: the repayment potential. No matter how large or small the sum, a loan will not be approved if the borrower seems unable to repay the loan. Taking a look at the employment history of the applicant helps credit institutions decide whether to grant them pre-approval or not.
Having a steady job equates to having a steady income, which is a clear indication of the fact that you can repay the loan.
Banks prefer borrowers who are employed at the same place for a minimum of 2 years. That would signify that the applicant is capable enough to keep holding the job in the foreseeable future. If your employment history shows that you frequently change jobs, it might affect the pre-approval.
Where to Get a Mortgage Pre Approval?
Now that it has been established that a mortgage pre approval greatly impacts the credibility of a person, we should find out where you can get that done. There are different types of institutions that can issue a mortgage pre approval letter to you.
So, you should compare the terms that the various institutions offer and choose the best. We have discussed them in detail in this section.
Mortgage Lenders
Mortgage lenders are institutions or banks that offer mortgages to interested parties. The pre-approval process requires applicants to submit the necessary documents and wait for the outcome. But banks are teeming with requests, and it would take a long time for your application to be considered.
Moreover, institutions don’t view your income as a whole; instead, they break it down into basic salary, HRA, PF, etc.
Most institutions consider the basic salary as income, which greatly reduces your income and might affect your debt service ratios. As a result, your loan amount will decrease, and rates will go up. Apart from all of this, you also have to go through the tedious task of approaching one creditor at a time and repeat the whole process.
Mortgage Brokers
Instead of approaching each creditor individually, you can simply go to a mortgage broker. A mortgage broker is an intermediary who brings individuals in contact with lenders. Naturally, brokers would be in contact with numerous creditors, so they will be able to lay down the options available to you after completing your financial investigation.
Moreover, brokers will process an application sooner due to the lack of rush. The rate of dividend will remain the same because, ultimately, it is the lender who approves the loan. There are no extra charges either because the brokerage fees are paid by the creditor. So, you go through the pre-approval process once, and a slew of lenders line up with their offers.
What Do I Need to Get Pre-Approved?
Since pre-approved mortgages have so many benefits, it is natural to want to get one as soon as possible. There are a few things that you need to bring together before applying for a mortgage.
Proof of Income
You have to provide recent stubs that reflect your income, along with W-2 wage statements and tax returns for the past two years. Additional income, like shares and bonuses, also impacts the pre-approval process.
Asset Statements
Bank statements of all the accounts that you are using to qualify for the loan have to be presented for scrutiny. Details of the brokerage account and retirement account also need to be submitted.
Debt Payments
Credit givers will take a look at your debt service ratios to see whether you earn enough to be approved for another loan or not.
What to Consider Before Pre-Approval Process?
Now that you realize that pre-approval can be of such a great impact, you are probably thinking of getting it done as soon as possible. But before you start the pre-approval process, there are a few things you should consider, which have been discussed below in detail:
Hard Credit Check
Keep in mind that the pre-approval process requires lenders to conduct a hard credit check into your finances. This means that your credit score will take a minor hit.
Time Duration
You should start the pre-approval process only when you are sure about starting property hunting. Pre-approval letters last only up to 90 days, so it is better to start checking out the property as soon as you get the letter in your hands.
Multiple Creditors
It is advisable to apply for pre-approval at multiple places. You can compare the terms being offered by various creditors and choose the one best suited for you.
My Mortgage Application for Pre-Approval Was Denied: What to Do?
It is not easy to get pre-approved for mortgages. In case your pre-approval is denied, there are numerous factors that could have affected the process. We discuss them in detail here so that you know what to do in such a situation.
Credit Score
The first and foremost reason for your pre-approval being denied is a bad credit score. No institution would like to risk its money on a person who has a bad credit history.
What to do: You can improve your credit score by clearing your standing debts and making your payment timely.
Employment History
Changing jobs frequently might reflect badly on your form and result in pre-approval being denied. After all, institutions giving credit need to consider the possibility that you will quit your job after taking out the loan and fail to pay the installments.
What to do: Try to stay at a job for more than a year. That would help to establish that your income will remain steady.
Debt Income Ratio
If you are already dealing with too many other loans, your debt-to-income ratio will be higher. Simply put, you might hardly have any income left to spare for your mortgage installments.
What to do: Clearing other outstanding debts is the only way to lower your debt-to-income ratio. Either you can wait till all other loan installments are over, or you can choose to repay them as soon as possible.
Conclusion
Since everyone dreams of having a house that they can call their own, there are numerous credit facilities available to make that happen. A mortgage is the most sought out loaning option while buying a house, and it is better to get pre-approved. Getting pre-approved goes a long way in showing the seller that you are genuinely interested in buying a property.
Factors like credit score, debt service ratio, and employment history greatly affect the whole process, and applicants must be ready for a hard credit check. But once you have the certificate in hand, you are one step closer to having your dream home.
FAQs
Is pre-approval for the mortgage necessary?
A mortgage pre approval is not necessary when it comes to house hunting. But most home sellers ask for a pre-approval because it lets them know that the buyer is genuinely interested in buying the property. Being pre-approved opens up more options, as the seller has the satisfaction of knowing that you will actually be able to buy the property that you like.
Can I get pre-approved for the mortgage with a bad credit score?
Even if you have a bad credit score, you can be pre-approved, but your borrowing options would be reduced. Creditors will also offer a lower loan amount at a higher rate of dividend.
How long does it take to get pre-approved for the mortgage?
Mortgage pre approval takes some time as a lot of information has to be verified. It usually takes around 10 business days to get a mortgage pre approval after you have filled out the form. Once the lender issues the certificate, it is good for 90 days.
Where is it better to get mortgage pre approval?
It is better to get the mortgage pre approval from a broker because you have to put in less effort. You get the same loan amount and similar rates sans the laborious process of approaching lenders individually.
