Home loan pre-approval:  Is it worth the hassle for homebuyers? 

So, you’ve found your dream home—the one you just pictured—and have confidently submitted an offer. You’re convinced that your steady job and perfect credit score will pull you through, despite bypassing the pre-approval process. However, when the property’s seller receives multiple offers and leans toward those with pre-approvals in hand, your hopes are reduced to rubble at your feet.

Save yourself the heartache by ensuring you don’t miss the key step to a successful purchase: securing your pre-approval.

What is a mortgage pre-approval?

In the world of real estate, a pre-approval refers to the process by which a soon-to-be homebuyer has their financial and credit information evaluated to determine the maximum amount they can be lent for a mortgage.

It’s important to note that a pre-approval is not a guarantee of a mortgage loan. The final approval will depend on factors such as the specific property being purchased, the appraisal of the property, and any changes in the buyer’s financial situation.

Who or which entities can grant pre-approvals?

A pre-approval for a mortgage is typically granted by a mortgage lender or a financial institution that offers mortgage loans. Homebuyers can approach various lenders, including banks, credit unions, or mortgage companies, to seek pre-approval.

How are homeowners benefitted from securing a pre-approval?

Better Understanding of Budget: A pre-approval helps home buyers determine their budget by providing a clear picture of how much they can afford to borrow. This helps them focus on properties within their financial means and avoids wasting time on homes that are outside their budget.

Awards Negotiation Power: Sellers often view pre-approved buyers more favourably because they have demonstrated their ability to secure financing. Having a pre-approval strengthens your position during negotiations and can make your offer more attractive compared to buyers who have not yet secured financing.

Quickens Closing: Since much of the financial documentation is already reviewed during the pre-approval process, it can lead to a quicker closing process. Sellers may prefer buyers who can close the deal efficiently, and a pre-approval indicates that you are a serious and prepared buyer.

Avoids Disappointment: Without a pre-approval, buyers might find the perfect home only to realize later that they cannot secure the necessary financing. This can be emotionally and logistically challenging, while also forcing buyers to return to square one with lost hope. Having a pre-approval helps buyers make offers with confidence, knowing that financing is likely to be approved.

Avoids Potential Crisis: During the pre-approval process, lenders assess various financial factors, such as credit history and debt-to-income ratio. This can help identify any obstacles that may need to be tackled before moving forward with a home purchase.

How long does pre-approval take?

The time it takes to get pre-approved for a loan can vary, but it typically takes a few days to a week. The process involves the homebuyer submitting detailed financial information, such as income statements, employment verification, credit history, and information about assets and debts, to the lender. The lender then reviews this information to assess the borrower’s creditworthiness and financial stability. Based on this evaluation, the lender determines the maximum amount they are willing to lend to the homebuyer for a mortgage.

Why would a lender not approve a loan?

Lenders determine pre-approvals by thoroughly evaluating the borrower’s financial situation, creditworthiness, and other relevant factors. They may choose not to approve a loan for various reasons, the most common of which including a borrower having poor credit history, insufficient income, a high debt-to-income ratio, insufficient collateral, inaccurate application, and unstable employment history.

Do lenders run your credit for mortgage pre-approval?

Most lenders do run a credit check as part of the mortgage pre-approval process. This allows them to assess your creditworthiness and helps in determining the terms and conditions of the potential loan. Keep in mind that multiple credit inquiries within a short period for the purpose of mortgage pre-approval are generally treated as a single inquiry to minimize the impact on your credit score.

Can you be pre-approved by multiple lenders?

Yes, being pre-approved by multiple lenders is possible. This can be a smart strategy to compare loan offers and terms, helping you find the most favourable financing options.

When obtaining pre-approvals from multiple lenders, consider factors such as interest rates, loan terms, fees, and the overall suitability of the loan for your financial situation. This comparison can empower you to make an informed decision and choose the lender that offers the best combination of terms for your needs.

How long does pre approval last?

The duration of a pre-approval can vary among lenders, but it typically lasts for 60 to 90 days. After the pre-approval expires, the lender may need to reevaluate your financial situation and run another credit check if you decide to move forward with a mortgage application. Please note that it is essential to check with the specific lender about the duration of their pre-approval and any conditions that may affect its validity.

Is a pre-approval the same as a pre-qualification? 

A pre-qualification in real estate is an informal estimate of how much a borrower may be eligible to borrow based on self-reported financial information. In contrast, a pre-approval is a more rigorous process involving a detailed analysis of a borrower’s financial documents, providing a formal commitment for a specific loan amount.

What cost is involved in this process? 

Obtaining a pre-approval for a mortgage does not typically come with a direct cost. Most lenders offer pre-approvals as a service to attract potential borrowers, and they usually don’t charge a fee for this initial step.

However, it’s important to note that while the pre-approval process itself is often free, there may be costs associated with the overall mortgage application process later on. Once you move forward with a specific lender and formally apply for a mortgage, you may encounter fees such as application fees, appraisal fees, and other closing costs.

To understand the specific terms and potential costs associated with a pre-approval, it’s recommended to inquire with the lender directly. Ask about any fees or costs that may be associated with the pre-approval process or the overall mortgage application process. Different lenders may have varying policies, so it’s essential to be clear on the terms before proceeding.

Do pre-approvals affect credit?

Getting a pre-approval for a mortgage typically involves a credit check, and this inquiry can have a minor impact on your credit score. The effect is usually minimal, and credit scoring models are designed to recognize that consumers may shop for the best loan terms by obtaining multiple pre-approvals from multiple lenders within a short timeframe. Multiple inquiries for the same purpose (e.g., mortgage pre-approvals) are often treated as a single inquiry, minimising the impact on your credit score. However, it’s essential to be mindful of unnecessary or excessive credit inquiries, as they can collectively affect your credit over time.

Does a home loan affect your credit score?

A home loan can impact your credit score through factors such as the initial credit inquiry, the opening of a new credit account, and the ongoing management of the loan. The credit inquiry associated with the loan application may result in a minor, short-term impact on your score. However, responsible management of a home loan can influence your credit score both in the short term and over the life of the loan.

What happens after pre-approval?

After securing a mortgage pre-approval, you can confidently search for homes within your budget and submit offers. Once your offer is accepted, you proceed to the formal loan application, undergo underwriting, and upon approval, attend a closing meeting to finalize the home purchase. After closing, you officially own the property and start making mortgage payments.

What checks do banks do after pre-approval?

After a pre-approval, banks conduct thorough checks, including a credit check to verify your credit history and score. They also verify your income through documentation such as pay stubs and tax returns, ensuring your ability to meet mortgage payments. Additionally, a property appraisal and title search may be performed to assess the property’s value and confirm clear ownership.

Can a bank decline after pre-approval?

Yes, a bank can decline a mortgage application even after issuing a pre-approval. Pre-approval is a preliminary assessment based on information provided by the borrower, and final approval is contingent on a thorough verification process. If the information provided is inaccurate or if the borrower’s financial situation changes during the formal application process, the bank may decline the loan.

Remember, you don’t have to give up on that dream house you’re still picturing. Simply ensure you establish a solid foundation for your home-buying process, rather than diving into purchase empty-handed. How? Go secure your pre-approval!