Mortgage Pre-Approvals: 5 Reasons Why They are Valuable
Is buying a home on your to-do list? Whether you’ve been working towards entering Ontario’s housing market for years or the idea was recently sparked by experiencing a pandemic in an urban area, learning the best way to go about this milestone is key to success. Before you hop onto MLS to check out if your dream home is for sale, you need to get yourself a mortgage pre-approval. What is a pre-approval and how does it enhance the home-purchasing process? Join us as we go through 5 different ways having a pre-approval adds value to home-buyers.
1 – See the Whole Picture
For starters, a mortgage pre-approval shows you exactly where you stand financially. Perhaps for the first time in your life, you will see every asset and liability under your name. The difference between the two is what you net. Next, the income you bring in will be balanced against the bills and expenses you are required to pay. To track this, financial institutions use a ratio called “Total Debt Service”, or TDS for short.
Depending on your overall budget compared to your down payment, you may be required to have mortgage default insurance, often provided by CMHC or Genworth in Canada. These insurers have stricter guidelines when it comes to overall debt ratios, meaning you’ll have to be bringing in a set amount of income versus your total monthly payments.
2 – Identify Potential Credit Problems
Another way that mortgage pre-approvals help potential buyers? They give you the warning you need if your credit health is failing. In a world where loans and charge cards are readily available, it’s easy to take on debt. One of the first steps in getting a pre-approval is having your credit checked. The check will show all of your current lending products as well as phone bills and other financial commitments.
The key to making it through a credit check with flying colours centers heavily around having a high credit score. Every individual with a social insurance number in Canada has one and they range from 300 to 900. If you’ve been letting payments go past due or have maxed out revolving credit products like cards and lines of credit, expect that score to be lower. Work hard to keep things paid off — and paid on time — and you won’t find credit an issue when applying to purchase a home.
3 – Make the Buying Process Faster
Feeling confident about where you stand financially? A mortgage pre-approval is still a pivotal asset to have. Should you find a home that meets your requirements, you’ll be able to act as fast as you’d like when putting in an offer. In a competitive market, this can mean the difference between you getting the house you want or losing it to a faster buyer.
It also allows you to prepare for the new costs you’ll be incurring once you own the property even breaking it down to a monthly or weekly level. This allows you to begin allotting your funds in a way that accommodates your purchase.
4 – Keep Things Realistic
What do you do with all of this information? At the end of your pre-approval appointment, your mortgage broker or financial representative will give you your maximum purchase price. This does not necessarily mean you should buy a home in that range. However, it lets you know where you absolutely must draw the line when shopping for your next property.
Your real estate agent will also greatly appreciate it if you stay within your pre-approval budget, as it limits wasted time and disappointments for everyone involved. True — you may not be able to afford your dream home right away, but by entering the process with the right information, you’ll be able to make financial decisions that help you move forward with limited risk of defaulting or losing the property after purchase.
5 – Reach Your Financial Goals
So you’ve made it through the pre-approval appointment, but the results weren’t exactly what you were hoping for. Now what? Don’t get discouraged! Now that you have your actual assets, liabilities and credit health in mind, making clear goals to get you where you want to be is simple. Is your savings account lacking? Work to build it with weekly or monthly contributions. Go through your current spending with a fine-tooth comb and weed out the extra expenditures that may be holding you back from buying a property. Make paying all of your bills on time a main priority. Do you struggle to keep track of due dates? Get a fridge calendar and mark each one in plain sight. Before you know it, you won’t even need to check it constantly as your commitments will be at the front of your mind.
Are you ready to take the first step in buying a home or investment property? Speak with Gerard Buckley of Mortgage Wellness and discover where you stand. Gerard has a wealth of financial knowledge spanning over an entire career along with an A+ rating from the Better Business Bureau of Ontario. He has helped many families prepare for successful home purchases all over Southern Ontario with offices in Collingwood, Owen Sounds, Saugeen Shores and Toronto. Reach out now to get started!