If you’re wondering whether mortgage pre-approval is required to buy a home, the short answer is no. It’s not required legally. But this piece of paperwork can work in your favor when you make an offer if you plan on buying a home with a mortgage. If there are any valuable tips for purchasing a home, then having mortgage pre-approval sorted and meeting with a reputable lender before you buy is one of them. Keep reading to find out why.
What is mortgage pre-approval?
Mortgage pre-approval is a letter from your bank or lender agreeing to lend you a specific dollar amount to buy a home.
The lender calculates your Debt-To-Income (DTI) ratio by dividing your total recurring monthly expenses by your gross monthly income to get a percentage. A good DTI is anything below 36%, but in general, banks can lend on a maximum DTI of 43%. Credit score, place of employment and documentation is also checked and verified.
There is usually a time limit on the mortgage pre-approval, for instance, 90 days. Once this lapses, you’ll need to apply for another one. Mortgage pre-approval can take up to 5 working days to process.
Each situation is different so it is best to talk with a couple lenders to determine which fits you best.
When can mortgage pre-approval work for you?
There are many scenarios when it’s good to have a mortgage pre-approval letter in hand:
1. How much can I afford?
If you’re not sure how much house you can afford, mortgage pre-approval gives you confidence that you’re viewing homes within your price range. You’ll know exactly how much you can borrow and you won’t be scrambling to adjust your budget later on. A mortgage calculator or lender can give you an estimate of your spending range. Although this provides a quick estimation, it’s not as valuable as a documented pre-approved amount.
2. You’re unsure if you can get financing
If you think you might have difficulty obtaining a mortgage once your offer is accepted, then it’s best to find out sooner rather than later. Not everyone fits the mold that lenders are looking for, you may be self-employed, have just started a new job or have a lower credit score. So you may have to put more time and effort into getting approved or ask a broker for help. But once you are approved, you’ll save yourself a lot of stress having completed this step already.
3. You want to make a firm offer
In a hot property market, you need to be ahead of the game. A pre-approval letter indicates to buyers that you’re a strong contender and you’re serious about buying. If there are other offers without pre-approval yours will stand out and give the seller greater confidence that the deal won’t fall through.
How to get mortgage pre-approval
Typically you’ll approach a lender or mortgage broker and fill out a loan application. Then it’s just a case of providing all the necessary accompanying documentation, such as:
- Payslips
- Past two years of income tax returns
- Past two years of W2’s
- Two to three months of bank statements showing downpayment
- Permission for the lender to pull your credit information.
Don’t just apply to one lender. By shopping around, you can compare banks to get the best rate possible. Using a mortgage broker can save you time as they shop around for you and can help you with your loan application. They also have relationships with many banks, so may be able to get your mortgage approval processed faster.
What happens if I don’t get mortgage pre-approval first?
If you don’t have mortgage pre-approval first, then you can still go ahead and make an offer on the house. But you’ll need to add a finance contingency into the purchase agreement. This contingency states that you’re only bound to the deal if you can obtain finance by a specific date (usually ten working days).
In this case, it’s best to get approval as soon as you can to strengthen your offer. A seller will be more wary of accepting an offer with a finance contingency as there is more chance of this holding up proceedings or causing the deal to fall through. You may lose out to another buyer who has gone to the trouble of getting pre-approval.