What to know about mortgage pre-approval
Buying a home, be it a condo, townhouse or detached building, is likely to be one of the biggest investments you will make in your life. That’s why very few people are able to purchase a home without a mortgage. But a mortgage isn’t just something you need to close a deal; it’s something you should be ready for as soon as you start house hunting.
What is a mortgage?
In the most simple of terms, a mortgage is a legal agreement between a lender and home buyer wherein the lender loans a set amount of money to the buyer for their new property. If all of the agreed upon terms are met by the end of the specified period, ownership of the property transfers to the borrower.
Looking a little more closely at mortgages, it’s important to know the main characteristics: the mortgage principal, interest rate and amortization period.
The mortgage principal is the amount of money being borrowed. It will total the full value of the purchase, minus the initial down payment, which is made by the borrower.
Mortgages come with interest, which is charged until the principal sum is fully repaid. The longer it takes to pay off a mortgage, the more interest you ultimately pay.
The amortization period is the time in which the borrower makes scheduled payments, usually ranging from 10 to 35 years. The longer the amortization period, the smaller the monthly payments, and ultimately, the more interest you’ll pay over the lifetime of the loan.
Where can I get a mortgage from?
You can get a mortgage from any approved lender. Mortgages commonly comes from:
Different lenders may have different terms, including interest rates, so it’s crucial you do your research and shop around to find the best deal.
What is mortgage pre-approval?
Mortgage pre-approval is when your potential mortgage lender looks at your finances and decides that they are willing to give you a mortgage if requested. At this point they won’t actually give you the loan, but will instead set the maximum sum and the interest rate they will charge should you make the request.
Generally, pre-approval lasts 60-90 days. At the end of this period, the agreement is no longer a standing offer. You can renew your pre-approval in perpetuity, but each time you do the terms may differ from the previous agreement.
Why it’s important to be pre-approved
Getting pre-approval is helpful to house hunters for many reasons. First of all, you gain an understanding of your financial limits, which will help narrow your search. If you know lenders are only willing to give you a mortgage for $700,000, there’s no sense wasting time looking at $1M homes.
You’ll also be able to get a clearer picture of what the total cost of your purchase will be by factoring in the interest rate. This will help determine whether you’ll be able to keep up with payments on the home after you’ve made the purchase.
Another benefit is that sellers are more likely to work with buyers who have received pre-approval. Because they know a lender is prepared to back the deal, there is less chance of the sale falling through. Because up until a mortgage is secured, a buyer is basically negotiating on an assumption.
All in all, the benefits of being pre-approved for a mortgage are substantial. From helping you understand your price range to giving you a better overview of the cost of your purchase to upping your standing in the eyes of sellers, taking this step will make your home buying venture go smoother, and increase the likelihood you end up with a home you’re fully satisfied with.