With so many intricate steps involved in purchasing your home, it can be easy to get lost in the details. One of the most important first steps in your home-buying journey is getting a home loan pre-approval. This step is crucial, not only because it helps you determine what you qualify for and enables you to create your monthly budget, but also because it provides you support, guidance and confidence as you search for your new home. Getting pre-approved for a home loan gives you a competitive edge in a competitive marketplace.
So how can you get pre-approved for a home loan? Start by working with your lender, ideally, before you start your search for a new home. Your lender will help you complete your home loan pre-approval application form. Be prepared to give them information about your income, assets, credit and debt history, as well as your work experience, plans for your down payment, and a history of where you’ve lived over the past three to five years.
Based on the information you provide, your lender will determine:
- Your ability to make your projected monthly mortgage payments, based on your current and future earnings.
- Your assets, including savings and investments, that determines the amount of your reserves that can be accessed in the event an emergency occurs and you’re unable to rely on your main revenue stream to cover payments.
- The amount of the loan you may qualify for.
- Your projected debt to income and ability to meet future obligations on a timely basis.
After thoroughly investigating each of those points, your lender will determine the loan amount you qualify for and give you a pre-approval letter detailing how much you’ve been approved for. Using this pre-approval, you’ll be able to search for homes within that price range – however, bear in mind this is only the number you’re approved for, and not necessarily the maximum amount you should spend. While your pre-approval letter may provide you confidence in house shopping and making offers, only you know how much you’re comfortable in spending. Make sure you don’t push yourself past your own financial limits if you’re not comfortable in doing so.
One more tip: make sure you know how long your pre-approval letter remains valid. If the pre-approval expires before you’ve found the home you want, you may need to go through the pre-approval process again just to ensure you have an accurate number to use as your guideline.
Working with a lender and having a pre-approval letter will give you confidence as you embark on this exciting journey, and it will enable you to make a solid decision as a home buyer. Don’t buy a home without it!