A wise first step in the home buying process is to obtain a mortgage preapproval, but many home buyers don’t know exactly what that entails or how a preapproval differs from a prequalification.
House next to calculator. Concept for appraisal, refinance etc...
The first thing you need to know is that prequalifications and preapprovals were not created equal. A prequalification is a general process that gives you a very basic idea of the amount you may qualify for. A preapproval, on the other hand, is a more comprehensive process that will result in more specific information – including the total amount you’re approved for, what your payments would be at that amount, and your interest rate.
With a prequalification, a lender is given general information about your overall financial situation; in turn, they give you a basic idea of the amount you may qualify for. Another way to get a general idea of what you can afford is to use our online Mortgage Affordability Calculator. This is a pre-emptive step that can be taken before you seek out a pre-approval, enabling you to enter the process with realistic expectations.
When it comes time to obtain a pre-approval, a lender will closely examine your financial background and credit history. It is a good idea to contact a Mortgage Broker to begin this process and let them use their expertise to determine which lender is best suited to your financial situation. With a preapproval, you will learn not only the total amount you’re approved for, but you are also given a rate hold on a specific interest rate for up to 120 days. This means that if interest rates go up some time in those 120 days, you don’t need to worry – you are already locked in at the lower rate. If rates happen to drop in that time, your broker will take the necessary steps to secure the new, lower rate on your behalf.
Once your preapproval is obtained, you are ready for the next step in the mortgage process – finding your dream home! For a detailed explanation of what happens next, be sure to check out next week’s blog post.