Often considered the first step in the mortgage pre-approval process, a pre-qualification is when a broker looks over your finances as a whole (your total income and debt) and provides you with an idea of what size of mortgage loan you might be able to afford. So, if you’ve been thinking about purchasing a new home, but are unsure of where to begin, a pre-qualification is the perfect place to start – and here’s why:
1. It Won’t Cost Thing
That’s right, it’s free! A pre-qualification is simply a conversation with a broker or lender who takes a brief look at your finances and gives you a rough idea of what you can afford. Ideally, lenders would like you to come back to them when it’s time to get pre-approved and, for this reason, they’re happy to help you with the pre-qualification process free of charge.
2. You’ll Get An Idea of What You Can Afford
The biggest perk in getting pre-qualified is gaining an understanding of what you will be able to afford. While not as concrete as mortgage pre-approvals, pre-qualifications are a great first step in beginning your home buying journey.
3. It Doesn’t Affect Your Credit
Just as pre-qualifications don’t cost you anything, the do not require credit check either. Unlike a pre-approval, which is considered a ‘hard check’ on your credit, pre-qualifications are simply a high-level glance at your finances and debt – namely GDS and TDS ratios – without any further investigation into your credit history.
4. You Don’t Need the Paperwork
Once you reach the pre-approval stage, you’ll be required to provide detailed information such as proof of income, bank statements, letters of employment etc. A pre-qualification simply requires the details of your income, debts, assets, and liabilities. Again, this is meant to give you a general idea of what you can afford without delving too deep into your finances.
5. You Can Get to Know Your Lender
A pre-qualification provides a great opportunity for you to get to know a certain lender or broker, ask questions and get an understanding of the mortgage approval process. If there’s a certain builder you’re wanting to purchase from in particular, this is the perfect time to get to know their preferred lender (who may be able to offer additional perks or advice when it comes to achieving your new home dreams).
6. You Get a Hold on Your Rate
Quite often the lender or broker who helps you with your pre-qualification will give you a ‘rate hold’. This means they’ll offer you a certain interest rate for anywhere between 30-120 days in the hopes that you will return to them for your pre-approval. While you’ll still want to shop around for the best local rates, this can be a major perk in terms of helping you secure a great interest rate for your loan.
If you’re buying your first home (or second or third home), a mortgage pre-qualification is a great way to get your financial bearings. Not only will it give you an idea of where you stand in terms of finances, it’s also your first step forward when it comes to finding the new home of your dreams.