Getting pre-approved for a mortgage
Here at The Outlier Model, Brian and I recently got pre-approved for another mortgage. Getting pre-approval is actually a really good idea of you’re considering a home purchase because it really forces you to consider what is within your budget. After all, you wouldn’t want to fall in love with your dream home, only to have the banks refuse to give you a mortgage, right? When you get pre-approved, it is a way for banks to say, “Yes, we WILL give you a mortgage for this maximum purchase price, provided you give us a down-payment of X dollars.”
Photo credit: rvaphotodude via Flickr
It’s a pretty simple process, but we put it off for a while even though we knew we’d need to get one. I have great aversion to paperwork. But you don’t need to emulate my poor time management skills!
Do your own research. How much can you actually afford? If you currently pay $1000 in rent, you certainly are not likely to magically afford a $1500 monthly mortgage! As a rough estimate:
- $250,000 mortgage: ~$1000 a month
- $300,000 mortgage: ~$1400 a month
But don’t think that that’s the end of it. You need to factor in strata fees and neighbourhood association fees (if applicable), the costs of hot water, the cost of property tax and the cost of insurance and other bills. That’s likely to add several hundred dollars to your monthly cost – can you still afford it? If not, then you need to lower your maximum purchase price.
Check your credit. Is your credit currently good? How high is your credit score? While if may not seem immediately important, your credit score has an effect on the interest rate that your bank gives you and the total amount that they are willing to lend you. For example, my bank was willing to lower my line of credit interest rate by 1%, simply because my credit score was good. If your credit is poor, it may be worthwhile to spend another year building up your credit.
Finally, contact different lenders. And yes, I do mean lenders in the plural. There is no guarantee that your regular bank will give you their best rate or maximum mortgage amount. It’s best to get several quotes at once so that you can compare mortgage rates and offers. You’ll need to provide proof of income (typically two recent pay stubs) and information regarding your assets, your debts, and the down payment that you intend to put down.
When Brian and I bought our first condo, we did not compare nearly as many lenders as we should have. As a result, we ended up refinancing and switching to a different back early on. (It was worth it!)
All in all, it only took our mortgage guy one week to assemble all the paperwork and get an answer back to me. Not bad!
Are you considering buying? What has been your experience getting a pre-approval?
22 Responses to “Getting pre-approved for a mortgage”
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Checking with different lenders is so important! We were astounded at the variety of rates that we were offered, as well as the different terms. I would also recommend thoroughly reading the terms. We have friends who decided to buy a bigger house when they had a kid and it turns out the mortgage they had was very, very inflexible. ie most will let you port the remaining balance to a new house as long as the lender approved… this one would not and also had a large penalty for discharge!
So far, the rates I’ve gotten have been similar, but it still makes it easier knowing that if I saw a place I liked, I could put an offer on it comfortably.
Reading the terms is a great tip – they’re dry and boring, but could save you a lot of money. In fact, when we were refinancing, it was very fortunate that we read the terms because the bank tried to charge us 5x more fees and interest that what we had agreed on, negating the value of refinancing! I refused to sign until it was fixed. :S
My wife and I got pre-approved when we bought about five years ago. It definitely made the process smoother. Great point on checking several lenders to get the best possible rate so you can have your money better work for you. In terms of all the paperwork involved, I think they must have killed three trees to complile it.
I’ve heard Warren Buffett say that he thinks all mortgage papers should be just one page in length. He says they should just have the terms of the loan and what will happen if you don’t pay. It’s an interesting argument.
Oh I know… Even when I think I’m doing something simple at the bank, like amending my monthly savings contribution, it’s still a good stack of papers and at least 3 signatures.
I’ve been told that when you contact multiple lenders for pre-approval, do so within a small window of time like a couple of days. Each one is going to pull your credit and when they do that’s like a small strike against you. Grouping them allows the credit score algorithms to count them as one pull instead of mulitples.
Also, depending when you plan on buying, don’t do this too far ahead of time. At least where we live, pre-approvals expire after about 60-90 days depending on the lender.
That’s true also. We did ours within a week of each other, so hopefully my credit score didn’t get dinged too much!
Is there a reason you contact different lenders yourself rather than going through a mortgage broker? When I was considering buying an apartment earlier this year I had a mortgage broker do all the running around and he found me a great rate and got me approved for a large mortgage. I didn’t end up taking it due to some uncertainty with my income, but it seemed like the best route to get the best rates possible.
I thought about going through a broker, but I do value the relationship I have with my bankers. For both banks I went through, I used someone who has worked with me in the past. I want my banker to know me and to advocate for me, not to be a customer that a broker dropped in their laps.
Another option is online companies, like LendingTree.com or RateSupermarket, that do the same thing as a mortgage broker. They provide you with multiple offers from various lenders.
I worked with a mortgage broker once and the results were disappointing. I felt that she was not looking out for your best interests. This can happen because there are incentives in place for both the mortgage broker and lender to gain your business.
That sounds about right. When I got my mortgage it was a bit below $250K and I paid a bit below $1000/month. Back then mortgage brokers didn’t want my business because I had only been working for 6 months and they thought I was too risky, so I had no choice but to go directly to individual lenders. I think if you don’t mind the work it doesn’t hurt to contact brokers as well as banks and other lenders, and get the best rate you can.
Depending on how long it takes us to find a place, we might do some more digging on rates. Right now, I’m hoping to get some freebies from the banks, like home inspection fees and lawyer fees.
I think me and the BF are a few years away from seriously considering buying a place, but I’m secretly excited to get pre-approved for a mortgage. I don’t know why, but I am so looking forward to it, because I know my credit is really good and so is the BFs.
Haha… I guess it’s getting exciting for what the pre-approval leads to, rather than getting exciting to do the pre-approval itself? It’s A LOT of paperwork!
Mine was fine. We did it before we even started looking for houses. And we wisely spent a lot less than the bank said we could afford!
Good job!
I already had a value in mind, based on what I can afford, so the bank basically confirmed it for me.
When we were going through the preapproval process last year, it was painful. So much paperwork! But now that we know what is involved, it’s a little more bearable, we just need to have our ducks in a row.
I just had a hard time finding all the paperwork they wanted, especially the tax stuff :S Ugh. Glad it’s done though!
We’re not paying quite that much in rent, but it is crazy to consider how much house we could really afford given how much we already spend/month. It’s all about getting that dang downpayment together for us.
That’s definitely the hardest part, and the reason more people don’t own their own place. Keep saving little by little and you’ll get there!
Getting a pre-approval isn’t a gaurantee as banks can still say no to an unconditional mortgage. However it is still a good idea to get a home loan pre approval these days.
We went through a broker, he’s a friend of a friend and was so glad we did, he took care of all the crappy negotiations I didn’t want to do. The mortgage I wanted wasn’t the best interest rate initially but he managed to talk the bank down matching the lowest rate we could get. I wanted this particular mortgage b/c it offered points we currently collect and it’s a huge amount of points on a mortgage payment, why not get something for paying a bill? It was terrifying how much we were pre-approved for. We were pre-approved for almost 100k more than we purchased!
Glad to hear that worked out for you!
We were also able to convince the bank to give us a lower rate. We had some competing quotes, so that helped.