So you’ve been looking to buy your dream home, and you’ve seen something for sale that grabs your fancy.
Now imagine yourself walking through the front door carrying a suitcase filled with cash. You’ll certainly get the buyer’s attention, won’t you? Of course, not many people are in the fortunate position of being able to pay cash for a property—but being prequalified for your home loan is the next best thing.
What does it actually mean to be prequalified for a home loan, and does this process put you under any legal or financial obligations? The short answer is no. Unlike a promissory note—also known as a loan agreement—a prequalification doesn’t require any financial commitment on your part.
However, this does not mean that you should set an unrealistic expectation of what your prequalification amount might be. Simply put, you wouldn’t walk into a store to purchase an item that you unequivocally could not afford. So why would you shop outside of your price range when buying a home?
A prequalification is a clear indicator of what you can afford, and what your credit rating is. These two indicators are essential when purchasing a home. The bank will only approve you for an amount that you can afford to repay each month, and a bad credit rating (under 600) will not be accepted.
According to recent statistics, 8.4% of home loan applications are declined due to poor credit scores, and 7.7% due to affordability.
Do your homework
Buying a home is an emotional and lengthy process. In addition to behind-the-scenes research and viewings, one needs to consider the process of putting in an Offer to Purchase, which—if accepted—is legally binding. This paperwork takes time, and requires input from the buyer, the seller, and the agent.
Without a prequalification, there is a chance that the offer will be rejected—and that all the work would be done in vain. Also, keep in mind that if you have been rejected by the banks, you will need to wait three months before reapplying for a home loan.
What a prequalification entails
A prequalification can be easily undertaken online, and acts as an estimate of what you can afford as it is based on your monthly earnings, expenses, and any debts that you may have. The certificate is valid for 90 days.
While this step won’t 100% guarantee that you will be approved by the banks, a prequalification is an easy way to determine the price category that you can shop around in. Conversely, if a prequalification is denied, it helps prospective homebuyers to be more realistic and to end the process before sinking any money or time into an application.
Does a prequalification give you an edge?
It certainly does, and the reasons as follows:
- Shopping with confidence: Knowing your credit score gives you the opportunity to address any issues before putting in an offer. A prequalification also gives you a pretty accurate picture of what you can actually afford.
- Standing out from the crowd: Sellers are more likely to accept an offer from someone who has a prequalification. This acts as proof that you can afford what you’re buying, and the likelihood that you will be approved by the banks. In a bidding war, a prequalification will help you to stand out.
- Avoiding disappointment: A prequalification protects you from putting in an offer on a property that you can’t afford, and will ten to one be turned down for.
WRITTEN BY RHYS DYER
Rhys Dyer is a real estate specialist.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.