If you’re looking to buy your first house you may already be aware of how much information there is to take in. On top of that, friends, family and experts are all likely to give you different and sometimes conflicting advice. When it comes to taking your first step toward your first home, our advice is to get a pre-approval.

What is a pre-approval?

A mortgage pre-approval is an application which, when processed, can give you a good idea about how much mortgage a lender may qualify you for. If you submit your pre-approval through a mortgage broker he or she will send your information to multiple lenders at once, kind of like using travelocity; one search and numerous results. If you were to submit your information to several lenders yourself it would cause a significant dip in your credit score. Sometimes the dip is enough to prevent lenders from approving you for a mortgage. But when a mortgage broker does it for you it only counts as one small hit to your credit. Plus, it’s free with no obligation to continue on with a home purchase.

How is it calculated?

Your broker will collect from you details on your financial profile. This includes your income, debts, and assets. They combine this information with your credit score and submit it to the lenders. The lenders will then send back pre-approval information to your broker who will compile a report for you. This report will show you all the lenders who have pre-approved you, how much mortgage they are willing to loan you and at what interest rate.

How do I use it?

Once you have chosen a lender your broker will secure your interest rate for a short-term period, usually 90 to 120 days. This gives you the chance to shop for your new home without having to worry about fluctuating rates. With pre-approval in hand, you’re ready to start house hunting and sellers will know you’re a serious buyer. Having a pre-approval before you begin your search shows others in the market that you are prepared. You know your budget and you know your lender is highly likely to approve your mortgage. If you were to find the house you want before you had your pre-approval you might have to wait a few days to hear back from the lender before being able to make an offer, days in which the house could sell to someone more prepared.

Keep in mind that just because a lender is willing to loan you a certain amount it does not mean you have to borrow it all. Carefully consider your budget and spending habits and make a smart choice you know you will be able to live with. Too many first-time home buyers get excited by how much a lender is willing to loan them but after the first few mortgage payments come out they start to realise it is more than they can handle. It’s a good idea to “play house” for a while before you sign on the dotted line. Adjust your finances to mimic your life with a mortgage and find out if it works for you. If it doesn’t you’ll know you have to make some changes before you’ll be ready for a mortgage.

Is this really what the lender will give me?

It’s important to remember that a pre-approval is not guarantee. There are a few circumstances in which a lender may refuse to approve your mortgage application even after they gave you a pre-approval. The most common reason is that the applicant’s financial profile has changed. This can happen if you lose your job or take a pay cut, accumulate more debt, or miss payments on services like a cell phone. Once you have your pre-approval, do not change a thing about your financial life! Keep your job, make your payments, and don’t make any new big purchases. If you really have to have that hot tub that seats 12, wait until you are negotiating your mortgage.

Another less likely reason a lender may not approve you is because the property you have chosen does not qualify, such as old homes that are not up to code or homes that are prices far above their value.

A pre-approval will give you the lay of the land and help you to chart a path to your first home. Contact us today to get started or try our free and quick online pre-approval below.

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