When you think of the first steps involved in buying a home, you’re probably thinking about talking to a real estate agent and viewing homes, however, these aren’t the first steps toward buying a home.
The first steps happen months before, in the office of your mortgage broker.
That’s right, the very first step to buying a home should be applying for a mortgage and getting pre-approved/prequalified.
Applying for a mortgage well before you buy a house will go far beyond just giving you peace of mind and confidence well your home shopping.
A pre-approval allows you to uncover potential issues you may not even know to look for within your application.
A pre-approval will find little things that are easy to fix like a blemish on your credit history, right up to major issues that can stop you for buying a home altogether.
Finding problems before you start house shopping can avoid embarrassing situations, allow you the time to take advantage of government programs and even prevent the potential for financial hardship caused by not being prepared.
Here are six more reasons why mortgage pre-approval is the most important and first step in the home buying process.
1. Understanding what you can afford.
One of the critical benefits of being approved for a mortgage early is that you’ll have an accurate view of your buying power. Your mortgage broker will use your income information and your down payment information to determine your maximum purchase price, and you’ll have a firm idea of how much home you can afford.
Once you know your maximum purchase price, you’ll know whether your buying power matches the types of homes and neighbourhoods you have in your sights.
If your pre-approval doesn’t match your expectations, you can take action early by increasing your savings, paying down debt, or work on boosting your credit score.
All of these tactics will increase your buying power, but they also take time to achieve a noticeable difference. With a few extra months, you can see your credit score jump, a noticeable increase in your saving, or knock out a pesky credit card or two. However, wait too long to get pre-approved, and you may not have enough time to impact the problem area and may be forced to wait even longer for that new home.
2. Renovate and customise your new home.
Being pre-approved can give you a leg up on your application for the Purchase Plus Improvements, which allows homebuyers to finance an additional 10% of the total purchase price for home improvements or renovations.
The maximum amount you can finance is $40,000, and this amount is added to your mortgage amount and paid off over time. With up to $40,000.00 available for renovating your home, there are limitless ways to customise your home to your liking.
What renovation would you do, Kitchen Bathroom, or new flooring?
They’re lots of reasons to renovate right after buying, including getting a good deal, increasing your equity, and even finding a home in a neighbourhood with limited supply. Not to mention just the pure satisfaction of matching your new home to your tastes, but again planning renovations takes time.
It would be best if you had the right contractor, appraiser, and initial budget in place so that when you find the home that you want, you can place a couple of quick calls assemble your team and get everyone working for you right away.
Most home purchase transactions are only giving you 3-4 days to get your mortgage financing in place, and this is not enough time to arrange/plan a renovation with an unprepared team.
3. Get a lower mortgage rate.
While Canada has been living in the era of ultra-low interest rates for almost a decade, mortgage interest rates have been slowly creeping up over the past year and a half. If you know you want to buy a home soon, and you want to take advantage of today’s low rates, applying for mortgage pre-approval will help you achieve this goal.
If you are working with the right mortgage broker, your pre-approval comes with the option to lock in at a specific mortgage rate for a certain number of days, usually 120 days.
Locking in a rate is called a “Rate Hold” and they usually only work with fixed-rate mortgages. However, if mortgage rates rise during your Rate Hold, you are protected and will still be offered the lower rate you were promised.
Also, don’t worry, if rates drop, your mortgage broker can ignore the Rate Hold and get you the best available mortgage rate at that time.
It’s a win, win! For this reason alone getting pre-approved 3 – 6 months early is the best plan.
4. Learn and understand the necessary closing costs.
Most people are aware of down payment requirements when it comes to searching for a home, but what about closing costs?
Closing costs include legal fees, land transfer tax, property taxes, home inspection fees, and more. A good rule of thumb is to budget between 1.5% and 4% of the selling price for closing costs.
If you haven’t budgeted for closing costs yet, now is the time to start. If your home buying budget is $300,000, you’ll need at least $4,500 saved for closing costs, on top of the $15,000 minimum down payment.
When you apply for a mortgage pre-approval, your mortgage broker can supply you with a list of typical closing costs for your area, and advise you on whether you have enough money saved.
If you don’t, an early mortgage pre-approval means you have plenty of time to get your ducks in a row before you begin searching for your new home in earnest.
5. Learn all the do’s and don’ts before applying for a mortgage.
A good mortgage broker will provide you with a checklist of everything you need for your final mortgage application, but going through the pre-approval process is an excellent way to determine whether there are any red flags to address right away.
Everyday items like proof of down payment, income verification, and your credit score will all be checked during the pre-approval process, which will give you time to rectify any errors well in advance. Your mortgage broker will also advise you on common mistakes to avoid between getting pre-approved and final approval.
Common mistakes to avoid before buying a home include:
- Changing/Quitting your current job
- Purchasing a new vehicle
- Applying for a new or unnecessary credit
- Spending some of your savings
These changes may improve your lifestyle, but they can affect your ability to qualify for a mortgage. Sometimes, these changes can have such a significant impact on your approval that you no longer qualify for a mortgage.
Understanding the impact that these changes can have, can help you decide when to take action on them. Put off the new vehicle until after you buy your new home, plan to change jobs first to increase your income and then give yourself the needed 3-6 months to make the lender confident that you are settled in before buying.
Again, a pre-approval allows you to plan and prepare for these problems without having to deal with them during the purchase process.
6. Credit is king, not cash.
Your credit score is a significant part of your mortgage approval, so the time to check your credit score and report is during the pre-approval process.
You can order a copy of your credit report from one of the two major credit reporting agencies in Canada: Equifax or Transunion. Alternatively, you can request a free copy of your credit score and report from a company like Borrowell.
It’s essential to ensure the information listed on your credit report is correct, and if you catch any errors, report them immediately to both credit agencies. Common mistakes include:
- Mis-spelt names.
- Debts that still show outstanding after being paid.
- Credit accounts that do not belong to you.
- Unpaid parking or speeding tickets.
- Unknown collections from cellphone companies.
Some errors, such as a misspelt name will not directly affect your credit score, but others, like misattributed credit accounts, can negatively impact your credit score.
Since your credit score is an integral part of the mortgage pre-approval process, it’s essential to get these errors fixed promptly. The process for correcting these errors on your credit report and seeing the change reflected on your credit score can take up to six months, which is why it’s a good idea to apply for mortgage pre-approval early.
In all of these cases, getting an early mortgage pre-approval will take the pressure off and give you time to make sure you are ready for the home buying process.
Buying a home is stressful, and a mortgage pre-approval helps alleviate some of that stress.
If you are at all thinking of buying a home, no matter how far away it may be, reach out to me today, and we can run you through a mortgage pre-approval and give the knowledge you need to take the steps that are necessary to buy your dream home successfully!
Moreover, hey, you may be surprised to learn that your dream of homeownership is closer than you thought!