Purchase Finance - Pre-Qualify or Get Mortgage Pre-Approval

Few people can afford a property purchase just from their own capital, and usually require some funding. You should get your purchase finance agreed in principle, before you start looking for property, and certainly before you make an offer to buy. There are two ways to go about this - getting pre-qualification or pre-approval.

To pre-qualify for a mortgage, you will be given an indication in principle, of what you could reasonably expect to borrow, based on your assets, liabilities and current income. But it is just a guideline, not a guarantee of funds.

Pre-approval is a step better. You provide more information to the lender, but get a pre-approval document that is valid for about 120 days. Being able to show a pre-approval document to a seller can make all the difference in securing the home you want.

Once you have pre-approval or pre-qualification for your mortgage, and have factored in the various costs you will have to pay to complete a property purchase, you can start the search for your new home knowing the maximum purchase price you can go to. Once you know your limit, don't exceed it, otherwise you can store up financial problems for the future.

Your mortgage pre-approval will be based on a number of factors.

1. Your ability to repay - are you currently earning enough to fund the monthly repayments? If you are employed but have been with your current employer only a short while, that may be looked on less favourably than if you had been in the same employment for a longer period. Being self employed will require you to demonstrate a track record of earnings, so usually two or three years audited business accounts are needed to verify your income.
   
   
2. The anticipated value of the property against which you will secure your borrowing. The banks like to know that the property is worth what you are willing to pay for it, not least because you will be doing so with their cash.
   
   
3. How much of your own capital is going towards the purchase price as a down payment. Banks like to see a reasonable commitment on your part. It tells them that if things start to go wrong financially, that you have enough vested interest to ensure that matters are sorted. It also gives them a financial cushion in the event of a default on a loan. Forced sales usually result in properties selling for less than their market value, because of the need for a quick sale. The smaller the percentage of the property that is funded by the bank, the less risk for them, and the quicker they can sell at a foreclosed price.

Once you know how much you can borrow, you must calculate all the other purchase expenses you will entail, and then you can calculate the maximum purchase price you can afford.

Make sure that you are aware of all the closing costs associated with buying a property, and that you have fully budgeted for them, before making any offer to buy.

When your budget has been made, you are ready to start house hunting in earnest!

What are the closing costs?