Applying for a mortgage can seem a daunting task. There are documents to be assembled, financial information that needs compiling, and the Universal Residential Mortgage Application to fill out – all four or six pages of it. It’s an easy thing to want to put off while you’re in the throes of looking for a new house.
But sometimes, the ideal time to apply for a mortgage is before you need it. Real estate professionals agree that Purchase and Sale Agreements are easier to complete – and negotiations easier to conclude successfully – if a bank or lending institution has already been approached, and a letter of pre-approval obtained before you place a bid on a property.
“Pre-approval” is not a commitment, but it’s the next best thing. It states that the financial institution has examined your finances – calculated your income, indebtedness, and net worth, pulled your credit report – and, based on these factors, concluded that you should be good for a mortgage whose face value tops off at a specific amount.
Obviously, if your circumstances change in the interim, that amount could be modified. But as a document to take with you on your home search, it’s a hard one to beat.
It confirms for the listing agent that you’re looking in the right price range. It tells the seller that you’re no fly-by-night tire kicker, and it saves both of you sweating out the financing contingency. It also saves you a night of form filling and document searching after you’ve negotiated the Purchase and Sale Agreement.
What won’t it do? Well, all the property specific contingencies still have to be met. The property inspection and appraisal still have to come out right. The title still needs to be clear. And you still need insurance. And if your circumstances change markedly, you may have start over – albeit from Square Two or higher.
Nevertheless, applying for mortgage approval early in the game makes the house purchasing task less onerous. Things to watch out for? A pre-approval is based on terms and interest rates in effect at the time of issue. If the market is volatile and rates are changing wildly, the face value of the approval may also go up or down to match what the institution estimates your income can afford for a payment. Or, points may be added as an up-front fee to lock in a specific rate. Be sure to understand exactly what your lender is offering, and how the terms could be modified.
A home purchase is often the single biggest financial transaction the average person will conduct in his or her lifetime. Going into it with accurate charts, a clear eye, and a good sense of which way the wind is blowing will go far to ensure clear sailing.
