As thrilling as the idea of buying a home in Toronto may be, the journey is not without some challenges. High costs aside, houses in Ontario’s capital city are in big demand most of the time. 

Though the market may go through a lull here and there where buyers have a competitive edge, the long-term trend seems to favour sellers overall. Fortunately, there are a few tips and tricks that can help you secure your new home while increasing your negotiating power. 

In this post, we’ll take a look at how getting a mortgage pre-approval can help you find the perfect spot to put down roots in Toronto.

Buying a Home: Financing 101

Under normal circumstances, a crash course in financing might make your eyes glaze over. However, when it comes to buying a home, knowing how mortgages work can help tilt the scales in your favour. 

It can mean getting a better house for your money, something in a more desirable neighbourhood, and you might even be able to negotiate a few extra perks. 

One of the first steps to obtaining your new home is to determine how much you might be able to borrow. There are two official ways to assess your potential loan amount:

A pre-qualification: A simple test you can perform online that will give you an estimate of what you will qualify for. The form will take minutes to fill out, and you will get an answer right away. The good news is that this step does not require a credit check or a lengthy visit to a bank. 

The downside is that a pre-qualification is not always 100% accurate. The number might change once you go through the entire mortgage application process.

Getting a pre-qualification is a good idea during your research stages or if you’re not sure if you will follow through with your plans to purchase. 

A pre-approval: A pre-approval is much more involved than a simple pre-qualification. You fill out a mortgage application form even before you’re ready to begin looking at houses. Once the lender assesses your credit, you will have a far more accurate picture of how much you can borrow.

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The Advantages of a Pre-Approval

Though many people confuse pre-approvals with pre-qualifications and vice versa, they are very different processes. Since a pre-approval is so much more in-depth, it can take longer to get your result. 

Once you’re approved, the lender will provide you with a certificate of pre-approval, giving you several distinct advantages when house-hunting.

  • You will know how much the lender is willing to provide so you can formulate your budget and start narrowing down possible listings. At this point, you can also calculate how much you will need for your down payment.
  • You will have a powerful negotiating tool once you find a house you want to place an offer on. Since you know that you are approved and for how much, you can drop the condition of financing if you’re in a competitive situation.
  • Since most sellers prefer unconditional offers, they may pick you even if another buyer offers slightly more money. 

Getting a pre-approval does not obligate you to buy a home. However, you are now in an excellent position to move forward with your goals.

The Limitations of Your Pre-Approval

A pre-approval is a great thing to have, but it does not make you bulletproof or guarantee that your loan will be automatically approved. It simply reflects what you can borrow, provided that nothing changes between now and your purchase. 

Just remember that this amount does not become official until your transaction finalizes. You’ll want to carefully guard your credit rating in the meantime so that nothing jeopardizes your ability to buy the home you want. If you take out a $50,000 car loan in the meantime, you may find your pre-approval amount drastically reduced.

How Home Appraisals Affect Your Final Approval

Home appraisals are another complication to be aware of before you start placing unconditional offers. Keep in mind that the lender wants to protect their investment. In the worst-case but rare scenario, they can foreclose on your home if you default on your payments. 

That’s why the bank will typically order an appraisal before officially approving your loan. It’s critical to understand that they will not lend you more than the appraised value, even if you qualify for a higher amount.

For example, imagine you got a pre-approval for $1 million. If the house is only appraised at $800,000, that is the highest amount they will allow. This is important to remember before you decide to participate in a bidding war.

No matter how much you love a particular home, you want to avoid offering more than the appraised value unless you have the financial resources to make up the difference. 

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Pre-Approval and Interest Rates

No one enjoys talking about interest rates, especially when they are on the rise. However, once again, you can give yourself an advantage by getting a mortgage pre-approval ahead of time. Here’s how it works in the real world.

Imagine you visit a mortgage broker in the middle of February and get pre-approved at a certain percentage. By the end of April, you’re ready to start placing offers, but interest rates have since increased. While other buyers may fret over the higher costs of borrowing, you can rest easy. Your pre-approval is valid for 90 to 120 days, which means you’ve got the lower rate locked in. 

What if rates decrease by the time you’re ready to buy? Your certificate automatically entitles you to the lowest rate from the time you get approved to when a seller accepts your offer. In either case, you win by getting a pre-approval.

Do you want personalized guidance to help you find your next Toronto home? We are happy to help! Reach out to us at david@batorigroup.com, bobby@batorigroup.com or call (416) 485-7575 to begin a conversation today.