What’s the deal with pre-approvals?
Buying a home is one of the biggest financial decisions you are likely to make in your lifetime and it can be a very complicated and expensive one! You will want to get a mortgage pre-approval.
When it comes to financing if you are only focused on getting “the lowest mortgage rate”, it could end up costing you thousands of dollars down the road. It may not be obvious at first, but the lowest rates often come with a lot of restrictions and penalties.
We know it can be tempting to scoop up the lowest rate you are offered – but know the facts about the pre-approval deal before you start making offers on properties!
Getting a pre-approval has some benefits, including:
- Measuring if you qualify, and how much you can afford
- Rate guarantee so you can hold on to a rate while you look for your property
- Free and no obligation to use the lender that pre-approved you
- Mortgage brokers can sometimes time the pre-approval to get better rates
Be aware that pre-approvals also have some flaws, including:
- Not being full approvals, so lenders don’t ask for your documentation to confirm you actually qualify
- Appraisals are mandatory for getting a mortgage, but they aren’t done at the pre-approval stage
- If the appraisal shows you overpaid or the property has problems, the pre-approval could mean nothing
- If you add debt, change jobs, move your down payment funds, or miss bill payments, it could void the pre-approval
You must realize that a flexible mortgage should never be traded for a restrictive one that is only slightly cheaper.
Many homeowners underestimate their need for flexibility over the term of their mortgage. Going for the mortgage with the lowest rate, often has the highest penalties.
If you are pre-approved at a low rate, be sure to do your home affordability calculations to factor in a possible increase in mortgage rates if something goes sideways and your pre-approval doesn’t hold up!