What does it actually mean to be pre-qualified 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 pre-qualification doesn’t require any financial commitment on your part. However, this does not mean that you should set an unrealistic expectation of what your pre-qualification 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?
Rhys Dyer, CEO of ooba Home Loans noted that as first-time buyers continue to surge, home buyer education remains a top priority.
“In quarter 3 of 2020 first-time buyers accounted for 54% of ooba’s bond applications. There is however concern that some first-buyers don’t have all the facts about what they’re actually signing up for,” he said.
A pre-qualification 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.”
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 (OTP), which – if accepted – is legally binding. This paperwork takes time and requires input from the buyer, the seller and the agent,” Dyer said.
“Without a pre-qualification, 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 pre-qualification Entails
A pre-qualification can be easily undertaken online and acts as an estimate of what you can afford.
Dyer said that while this step won’t 100% guarantee that you will be approved by the banks, a pre-qualification is an easy way to determine the price category that you can shop around in.
“A pre-qualification is based on your monthly earnings, expenses, and any debts that you may have, and the certificate is valid for 90-days,” he said.
“Conversely, if a pre-qualification is denied it helps prospective home-buyers 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?
Dyer said it does, and lists the reasons as follows:
Shop with confidence: “Knowing your credit score gives you the opportunity to address any issues before putting in an offer.”
Affordability: “We consider your financial information in the same way that the banks do. This gives you a pretty accurate picture of what you can actually afford.”
Stand-out from the crowd: “Sellers are more likely to accept an offer from someone who has a pre-qualification. This acts as proof that you can afford what you’re buying and will be approved by the banks. In a bidding war, a pre-qualification will help you to stand-out.”
Avoid disappointment: “A pre-qualification protects you from putting in an offer on a property that you can’t afford and will ten to one be turned down for.”
According to ooba’s statistics, 8.4% of home loan applications are declined due to poor credit scores and 7.7% due to affordability.