Obtaining a mortgage can be one of the most confusing parts of buying a home. It’s essential to understand the steps to getting a home loan and the key terms that are used by lenders. Pre-approval and approval are two different stages that come at opposite ends of the homebuying process.
During the mortgage pre-approval process, the lender is looking at your finances to determine how much money you can borrow. They are reviewing your credit, your income, your assets, and any debts you may owe. A pre-approval is not a guarantee that you will be able to take out a mortgage, but it is a useful step for your homebuying process because it will give you an idea of the type of mortgage and interest rates you can expect later on.
Final approval takes place after you’ve found the home you want to purchase. The lender will reassess your financial situation and will consider the property as well. During this stage, the lender is looking to see if it makes sense for them to loan the money to purchase the property. The bank won’t lend money to pay for a property if they feel the value is not there, as they want to make sure they'll be able to recoup their costs in a worst-case scenario.
Getting pre-approved for a mortgage does not mean you will automatically receive final approval. If your finances have changed since you first went through the pre-approval process, that may affect how much you are able to borrow. The specific details of the property you want to purchase can also influence whether or not you will be approved.
There are some situations where you get pre-approved, you find the perfect property, the property is approved, but you don’t get final approval because it’s subject to mortgage insurance approval. When you're putting less than 20% down, your mortgage has to go through the final approval process twice—one will be with the bank, and the next one will be the mortgage insurance provider.
The reason why the mortgage insurance approval process is so important is because they're actually providing insurance on the amount that's borrowed from the bank. Upon reviewing, the insurer may approve or they may decide the loan deal needs to be restructured. If it needs to be restructured, this can be done in a variety of ways including putting more money towards the down payment, paying off debts owed, or adding a cosigner to the loan agreement.
In most cases, when the lender doesn’t like the property but the homebuyer has already been pre-approved, the homebuyer will stay with the lender and find another property. Lenders may not approve a property if they feel the selling price doesn’t match the actual value, or if they may think there’s unforeseen health hazards or other risks.
Keep in mind that if a bank denies approval for a property, it is usually because the concerns they have are significant. As a buyer, you should listen to the reasoning behind the denial and consider searching for a new property—after all, this is your investment as well, not just the bank’s.
Mortgage pre-approvals are non-binding, so you can absolutely switch lenders before seeking final approval. Let's say you're building a brand-new home and your build process is taking 10 months. During that time, you do some additional research and realize that you could have more favorable interest rates with a different lender. Since you haven’t signed anything yet, you can switch your lender within that 10-month period. You are not locked in until the bank actually lends out money for the transaction to be closed.
Your mortgage pre-approval is not going to affect your credit score if you only go through the process once or twice. However, applying to multiple lenders within a short period of time—especially if you’ve already been pre-approved elsewhere—can be a red flag for the credit bureau and end up hurting your credit.
Your credit score is a way for lenders to assess your risk by reviewing a variety of criteria:
●How long have you lived in your home?
●How long have you worked at your job?
●Are you single, married, or divorced?
●Do you have an excessive amount of applications for new credit lines of credit?
●Are you regularly meeting or exceeding the limits on your credit cards?
All of those criteria influence your credit score and will be examined by lenders when you apply for mortgage pre-approval or approval. To avoid hurting your credit, it’s best to use caution and research lenders before beginning a pre-approval application. Find out what each bank’s rates are and what their terms and conditions are—then submit an application to the one or two that you think are the best fit..
To be clear, you don’t need to obtain mortgage pre-approval in order to start shopping for a home. A real estate professional will be happy to start showing you homes and submit offers on your behalf without a pre-approval in your hand.
However, it’s a good idea to apply for mortgage pre-approval for two main reasons. First, it lets you know that you’ll more than likely be able to obtain a mortgage and the specific amount you’ll be able to borrow based on your financial situation. Second, a pre-approval shows sellers that you are a serious buyer and will be able to close on the home at the price you’ve agreed to pay. So, while you don’t need to have one, it can definitely help to get pre-approved before you submit your first offer on a home.
Find more resources and information on the entire homebuying process on Brookfield Residential’s blog. If you want to learn more about how we can help you find the new home of your dreams, request more information today.