Thursday, August 18, 2011

Understanding the Mortgage Process

Many first-time homebuyers may be wondering where they should start with the mortgage process. A common source of confusion is the difference between mortgage pre-qualification, pre-approval and rate holds. Recently, the Toronto Star published a good explanation of the difference between these three terms.

Mortgage Pre-qualification

A mortgage pre-qualification provides an estimate of the mortgage total that you may be approved for. The estimate is based on your income, your current debts and estimated down-payment.

It doesn’t take into account your credit rating nor does it give you a detailed analysis of what you can afford. It does however give you an opportunity to better understand what mortgage rates and options are open to you.

Mortgage pre-qualifications take place prior to a mortgage pre-approval and it is important not to use the terms interchangeably.

Mortgage Pre-approval

A mortgage pre-approval comes after a pre-qualification.

This process will provide you with detailed information about the home you can afford based on your savings and income, and the corresponding mortgage payments for a range of purchase prices.

You’ll need to provide the lender specific documentation so they can assess your financial situation and current credit rating and ensure that you satisfy all the requirements. There is usually no application fee associated with a pre-approval and you are in no way committed to the bank or mortgage broker from whom you obtained your mortgage pre-approval. Remember, however, that if you pull your credit score more than three times within six months, you may lower your credit rating.

Once your application is approved, you will get a written conditional commitment for a defined loan amount, which you can show to sellers when purchasing a home.

Mortgage Rate Hold

A rate hold refers to the locking in of a certain mortgage rate for a specified number of days - usually 60, 90 or 120 days. It’s important to note that just because a rate hold ensures you will receive a certain interest rate, it does not mean that a lender has accepted your mortgage application. A lender could still refuse to provide you with a mortgage stating that all conditions were not met.

If you are going with a mortgage broker, you can potentially lock in a few different mortgage rates with various lenders versus locking in with only one bank at a set rate. If your current mortgage rate declines, your lender will typically match it.

If you receive a mortgage pre-approval, you can be automatically signed up for a rate hold so it’s best to get a mortgage pre-approval before you get a mortgage rate hold.

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