Pre-qualify: When and why?

By Rhea-Simone Auguste

©Moon Light Rental Ltd.

moonlightrental@yahoo.com

 

Mary Marshall wanted to buy a house. She did a rough calculation of how much she thought she would get in a mortgage based on how much rent she was currently paying. Then, she called a realtor and said – “I am looking for a house around 1.5 million”. Mary was linked to a sourcing agent who promptly sent her a list of homes close to her given price range. After viewing several properties, Mary found the perfect home in her ideal neighbourhood. She signed an offer to purchase with a bid on the house and excitedly took the information to the bank to get started on her mortgage process.

Mary reached the loans department with all of her payslips and financial documents and the information on her dream property, certain that she would get through with her loan in a hurry. The loans officer went through all of her documents and with one sentence, crushed Mary’s hopes for buying the house – “You are not qualified for 1.5 million.”

“Not qualified?” Mary was confused. She paid $8000 a month in rent and she figured she could get a 25 year mortgage at least so she should be able to handle a 1.5 million dollar mortgage. However, she had a few loans, 2 credit cards and she had defaulted on a loan previously and that affected her credit rating. The bank would only offer her $900,000. Now she had to start the process of house-hunting all over again and say goodbye to the idea of owning the gorgeous property she considered her dream home.

Mary could have avoided the heartbreak and the hassle if she had gone to her bank first.

If you are seriously thinking about making your first home purchase, your first step should be getting a pre-qualification from your bank. The pre-qualification process is a useful tool as it helps you to get a clearer picture of your current financial status. Doing a pre-qualification is easy and some banks even do them over the phone. You simply supply your bank or mortgage lender with your overall financial picture, including your debt, income and assets. After evaluating this information, a lender can give you an idea of the mortgage amount for which you qualify. There is no charge for this pre-qualification – this is a free service offered by most banks.

A pre-qualification should not be confused with a pre-approval however. Getting pre-approved is the next step, and it tends to be much more involved. You’ll complete an official mortgage application (and usually pay an application fee), and then supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. (Typically at this stage, you will not have found a house yet, so any reference to “property” on the application will be left blank). From this, the lender can tell you the specific mortgage amount for which you are approved. You’ll also have a better idea of the interest rate you will be charged on the loan and, in some cases, you might be able to lock-in a specific rate. With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. Obviously, this puts you at an advantage when dealing with a potential seller, as he or she will know you’re one step closer to obtaining an actual mortgage.

The advantage of completing both of these steps – pre-qualification and pre-approval – before you start to look for a home is that you’ll know in advance how much you can afford. This way, you don’t waste time with guessing or looking at properties that are beyond your means. Getting pre-approved for a mortgage also enables you to move quickly when you find the perfect place. When you make an offer, it won’t be contingent on obtaining financing, which can save you valuable time. In a competitive market, this lets the seller know that your offer is serious – and could prevent you from losing out to another potential buyer who already has financing arranged.