What does being pre-qualified for a home loan really mean, and does this process subject you to any legal or financial obligations?
The short answer is no. Unlike a promissory note – also called a loan contract – a prequalification does not require any financial commitment on your part. However, that doesn’t mean you should set an unrealistic expectation of what your prequalification amount might be.
Put simply, you wouldn’t go to a store to buy something you clearly couldn’t afford, so why would you shop outside of your price range when buying a home?
Rhys Dyer, CEO of ooba Home Loans, noted that as first-time buyers continue to increase, educating homebuyers remains a top priority.
“In the third quarter of 2020, first-time buyers represented 54% of requests for ooba bonds. There are concerns, however, that some first-time buyers may not have all the facts about what they are actually signing up for, ”he said.
Prequalifying is a clear indicator of what you can afford and your credit rating. “These two indicators are essential when buying a home. The bank will only approve you for an amount you can afford to pay off each month and a bad credit score (less than 600) will not be accepted.
Do your homework
“Buying a home is a long and emotional process. In addition to research and behind-the-scenes tours, one should consider the process of setting up an Offer to Purchase (OTP), which, if accepted, is legally binding. This paperwork is time consuming and requires input from the buyer, seller and agent, ”Dyer said.
“Without prequalification, there is a chance that the offer will be rejected and all the work will be done in vain. Also, keep in mind that if you have been rejected by the banks, you will have to wait three months before reapplying for a home loan.
What prequalification involves
Prequalification can be easily done online and serves as an estimate of what you can afford.
Dyer said that while this step doesn’t 100% guarantee that you’ll be approved by the banks, prequalifying is an easy way to determine which price category you can shop in.
“A prequalification is based on your monthly income, expenses and any debts you may have, and the certificate is valid for 90 days,” he said.
“Conversely, if a prequalification is refused, it helps potential buyers to be more realistic and to end the process before spending money or time on a request.”
Does prequalification give you an advantage?
Dyer said yes, and lists the reasons as follows:
Buy with Confidence: “Knowing your credit score gives you the ability to sort out any issues before you bid. “
Affordability: “We treat your financial information the same way banks do. It gives you a pretty accurate picture of what you can actually afford.
Stand out from the crowd: “Salespeople are more likely to take an offer from someone who is prequalified. It proves that you can afford what you buy and that you will be approved by the banks. In a bidding war, a prequalification will help you stand out.
Avoid disappointments: “Prequalifying protects you from bidding on property you can’t afford and will be refused ten to one.”
According to ooba statistics, 8.4% of mortgage applications are refused due to bad credit scores and 7.7% due to affordability.