Pre-Approval Letter

The Advantages of a Loan Pre-approval Letter

Why A Pre-Approval Letter?

A pre-approval letter is a statement from a lender that you, as a prospective homebuyer, are qualified to service a specific amount of debt. If you are bidding on your dream home, being pre-approved adds an advantage over competing bids. It can also help you realize what your price ceiling is for the purchase of a new home. There is nothing more disappointing than falling in love with a home, and later discovering it is out of your price reach.

Pre-Qualification vs. Pre-Approval

Make sure you know the difference between pre-qualification and pre-approval. Pre-qualification merely requires that you provide some general information about your income and debt levels to a broker or lender. Little or no confirmation of the information is included in pre-qualification. Therefore, a pre-qualification can give you an idea of price range and mortgage payments, but, when it comes time to negotiate an offer, it carries little weight. Pre-approval, however, is not just provided by a broker or lender; the information must be verified. Required information includes documentation about your income, the source of your down payment, credit cards and any outstanding loans you may be carrying.

Do a Credit Rating Check

It is probably a good idea to find out if you have a good credit rating before approaching a lender, especially if you have any doubts about your rating. Your local credit bureau should provide a credit rating report to you free of charge. The same free information can be obtained through the mail by calling Equifax at 1-800-465-7166, or TransUnions Consumer Relations Centre at 1-800-663-9980.

To receive information on your credit rating, you will be required to fax the following information:

• two pieces of government issued identification
• social insurance number
• date of birth
• your current address, plus any address where you've resided in the last five years
• the name and number of your current employer

Expect to wait at least ten days to receive your report by mail.

When you have received your report, you will know if there are any roadblocks in the way of acquiring your mortgage. This report can then be presented to potential lenders.

Keep in mind, however, that lending institutions can (and do) access information on the number of credit checks requested by you or other lenders.

With an acceptable credit rating, the lender should then be able to provide you with a loan rate, lock in the loan if you want, and provide a closing statement that outlines the cost of your loan. The lender should also be able to state the amount required for a down payment on your home.

If your credit rating is not quite up to snuff, the services of a mortgage broker may be required, as opposed to a direct lender. A mortgage broker will search out a variety of lenders to find one who can accommodate your loan.

The Pre-Approval Letter Advantages

With a pre-approval letter, the buyer has several advantages:

• With a known price range, you can concentrate on finding the right home.
• Once you have found the right home, the pre-approval letter will almost certainly have leverage in negotiations. A seller receiving several bids in the same price range wants a buyer who can close the deal. The pre-approval letter accompanying your offer is a great advantage over the other prospective buyers (who are also admiring the beautiful hardwood floors and the large backyard!) Both the buyer and the seller have greater peace of mind knowing that the other is seriously committed to the deal.
• The great advantage of being pre-approved is the time saved. If the seller is in a hurry to move, or has already moved because of a new job in another city for example, your offer will be even more attractive since you will be able to close much faster. Arranging financing is usually the most time consuming step in buying and selling a home. With financing already in place the appraisal, inspection and closing will only take a few days to complete.
• Another perk is that sellers and agents are more interested in taking the time to show you a house. Pre-approved clients are often given the royal treatment!

The Fine Print

The pre-approval letter is time-sensitive and usually expires within 60-90 days (a 90-day period is most common and most beneficial to the consumer). The entire transaction must take place within the given time frame in order to receive the pre-approval rate.

There are three steps in the process:

• pre-approval
• application. The application takes place when the prospective homeowner finds a property and applies to receive the mortgage.
• Funding. Funding is the actual arrangement of the mortgage and payment to the other party by your bank.

Finding the home you want, making the application, and arranging the funding within the pre-approval period can be difficult. Lenders, therefore, have a few methods of calculating interest rates that actually benefit consumers:

• If the 90-day period has expired, a customer is not eligible to receive the pre-approval rate. However, if the application took place within the 90-day period, the customer would receive the lower rate of either the funding date or application date.
• If the closing date extends beyond 90 days from the application date, the customer would then receive the lower rate of the funding date or the 90th day prior.

It is advantageous to the buyer to be able to complete the entire transaction within the pre-approval time frame, especially when interest rates are rising. (If, for example, rates are 7% on the day of pre-approval, 7.2% on the application date and 7.5% on the funding date, you would receive your mortgage at 7%.)

Keep in mind these important factors about the pre-approval letter:

• the pre-approval is not binding on the lender
• it is subject to the appraisal of the house you wish to purchase
• it is subject to your financial situation remaining unchanged throughout the duration of the pre-approval period

Pre-approval is, overall, a great benefit to consumers as it saves time, worry, and money.