What is a
Preapproved Mortgage?
Sometimes, buyers are confused about what a preapproved mortgage actually is. Well, it's really not that complicated.
It's like getting an approved mortgage prior to submitting an offer, or even beginning to physically view homes for sale, instead of waiting until you've negotiated a successful Agreement of Purchase and Sale.
It's a good idea to seek a written mortgage preapproval from your bank or credit union, or the mortgage broker recommended by your agent, as early in the process as possible. By the way, while shopping the mortgage market for you, a mortgage broker or mortgage agent can sometimes arrange ...
More Favourable Terms
... for you than your own retail bank because they deal directly with the bank's commercial division. Thus, you may wish to check out their services. Your real estate agent can likely recommend one for you.
To get a mortgage preapproval, you'll need a confirmation of employment income (financial statements or tax returns, if you're self-employed), written confirmation of your down payment (unless you're using your own bank) and a credit report which, with your authorization, can be obtained by your lender or broker.
Don't accept a letter from your lender or mortgage broker that simply states that they'll lend you funds for a mortgage subject to confirmation of all of the above. That will not help much when trying to negotiate a fair deal with a seller.
If your REALTOR® can assure the seller and their agent that the condition on financing included in your offer is a mere formality, that you've been pre-approved already, and can show them your actual preapproval certificate or letter to prove it, you'll be in a ...
Stronger Bargaining Position
And your agent can remind the seller that only their property must be approved by the lender by way of a realistic appraisal. If the house fails to appraise to the lender's satisfaction, that is at a value that doesn't excessively exceed the negotiated purchase price, and you require a high-ratio mortgage (more than 80% of the purchase price), the mortgage might be declined unless you can raise your down payment, which isn't always possible.
Aside from getting all your ducks in a row, another good reason to obtain one before commencing your home search is that a ...
Preapproved Mortgage
will Inform about How Much you can Spend
... for a home. Add the maximum loan amount to your down payment and you'll know your maximum affordable purchase price.
It's a great guide for first time home buyers. You get to avoid the heartache of disappointment. After finding your dream home, you discover that you can't buy it because you don't qualify for the mortgage needed to buy it. And you've wasted a ton of time in the process.
So, is it wise to obtain a preapproved mortgage before starting your home search? Absolutely. To learn more about buying a home and how much you can afford to spend, visit this CMHC page.
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