No one would argue that buying a house in Toronto isn’t an expensive endeavour. It’s also one of the most rewarding and exciting milestones anyone could ever achieve. We can’t imagine a better place to live than in Ontario’s capital city, with its unrivalled arts and entertainment scene and natural beauty
The incredible lifestyle that awaits you as a Toronto resident and homeowner is all the more reason to get your finances in order so you can buy that house you’ve always dreamed of. Today, we’ll talk about the simple yet all-important steps to obtaining a mortgage. More specifically, we’ll highlight the difference between pre-qualification and pre-approval.
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Everything to Know About a Pre-Qualification
If you type “pre-qualification” into Google, thousands of websites instantly pop up. Most will allow you to do a quick estimate in exchange for entering your email address. It’s a simple and stress-free first step to get an idea of how much funding a lender might provide based on your finances.
All you need is some general information, and there is no credit check at this point. The good news is it’s easy and non-commital, an ideal way to get the ball rolling. The bad news is that it’s not necessarily accurate – and very subject to change.
If you’re testing the waters and not 100% ready to move forward, a pre-qualification offers several advantages. It’s free, fast, and might just be the boost of confidence you need to move forward. Just be sure to remember that the real number might change once you are further along in the process.
If you’re looking for a home in an area with non-stop excitement and plenty of fun things to do, you can’t go wrong with Toronto. Here are just a few activities residents and visitors love:
- Cycling in the Summer: Toronto’s Hottest Bike Trails
- Let the Music Play: A Guide to Toronto’s Incredible Venues
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What Does a Pre-Approval Mean?
A mortgage pre-approval is far more involved than a pre-qualification. The lender will ask detailed questions regarding your assets, income, and any debt load you are carrying.
Unlike a pre-qualification, lenders will also perform a credit check to confirm your financial position and assess your ability to cover your mortgage payments. While a pre-approval is more in-depth than a pre-qualification, it is not a guarantee of funding.
Nevertheless, you can reasonably expect your lender to follow through as long as there have been no major changes to your credit rating or income. Many lenders will provide you with a Certificate of Pre-Approval. As you’ll see in a moment, this document comes in handy when it comes time to place your offer and negotiate.
When to Get Pre-Approved
A mortgage pre-approval indicates more of a commitment, which makes it an ideal step for serious buyers with plans to act quickly. Generally speaking, if your purchase is a year or two away, it doesn’t hurt to get started with a pre-qualification.
If you plan to buy in the next few months, you could skip the pre-qualification altogether and go straight for a pre-approval. Once a lender gives you a certificate, it’s very important that you avoid any unnecessary changes as much as possible.
The Limitations of a Mortgage Pre-Approval
Until your purchase is finalized, your mortgage pre-approval amount is not set in stone. Buying expensive items on credit, such as a new car or vacation, can impact your debt-to-income ratio.
As a result, your lender may reduce the amount you qualify for or even rescind the offer of financing altogether. If you can, we recommend that you wait to buy that new car or change your job until after your closing date.
Home appraisals are another critical issue to keep in mind, even with a pre-approval in hand. A lender will not cover more than the fair market value of a house, which can cause an issue if you are not aware.
Imagine the appraised value of a house is $900,000, but you love it so much you offer $950,000 to edge out other buyers. You may just end up having to cover that extra $50,000 out of your own funds. This is why you’ll want to be cautious about placing unconditional offers – and of course, always work with a real estate agent who can guide you through the nuances of the market.
Wherever you are in your home-buying process, we have resources to help. The posts below are a great place to start:
- What You Need To Know About Buying A House In A Changing Market
- How the Government is Helping First-Time Buyers in Toronto
- Should You Buy or Sell First in a Shifting Market?
The Advantages of a Pre-Approval
Earlier, we mentioned that a Certificate of Pre-Approval can give you a competitive advantage when placing offers. One of the reasons is that sellers love clean offers without conditions whenever possible. Your pre-approval allows you to drop the condition of financing (remember to keep appraisals in mind) and demonstrate that you qualify for a mortgage.
Let’s take a look at some scenarios that can and do happen in today’s market.
- You’re placing an offer while in competition with another buyer. The other buyer offers the same amount of money, but they haven’t yet obtained a pre-approval. All things being equal, you will likely win.
- You’ve found a home you love during a busy market. There are no competing offers – yet – but you must act quickly. Your pre-approval allows you to bid with confidence, knowing that you’ve already qualified for a mortgage.
- Another buyer has outbid you by a small amount, but once again, they don’t yet have a pre-approval. Though your offer is a little less, the seller has more confidence in your ability to close. They could very well choose you even though the dollar amount is slightly lower.
Real estate never comes with guarantees, especially in a fast-moving and dynamic market like Toronto. However, there are countless small steps you can take to ensure you have a winning edge. A mortgage pre-approval is just one valuable tool that can make your offer stand out.
Do you have more questions about buying or selling a home in Toronto? Our team is happy to guide you no matter where you are in your journey. Reach out to us at erica@ericareddy.com or call 416.443.0300 to learn more.
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