Buying a home can be complicated, especially when it comes to financing. Fortunately, there are a few things you can do to prepare for a smooth and successful purchase. One of the most important is applying for mortgage pre-approval. During this crucial step, your lender will review your finances and provide you with a letter stating how much financing you’re eligible to receive. There are several benefits to having this information at hand, and it’s important to understand the role it can play in the purchase process.

If you’re ready to start the search for your dream home, here are five things to know about mortgage pre-approval…

1. It’s not pre-qualification

One of the biggest mistakes borrowers make is assuming pre-qualification and pre-approval are the same. Both processes involve having a lender review your information to determine how much mortgage you’ll likely receive. That said, there are some key differences you should be aware of. The most significant is that pre-qualification will simply give you a rough idea of how much financing you could qualify for. In contrast, pre-approval is a conditional agreement that your lender forms with you after they’ve verified your finances. It brings you one step closer to closing—though you’ll still have to meet all of the terms laid out before you’re fully approved.

2. Sellers look for it

In a competitive market, buyers should do everything in their power to make their offers stand out, which includes obtaining pre-approval. While money is usually the deciding factor during bidding wars, most sellers will look at an offer in its entirety (especially when there are two or more bids for similar amounts). Pre-approval shows that you’re serious about completing your purchase—so much so that you’ve already started working with a lender. It also demonstrates that you’ll almost certainly have the funds you need to make it to closing. Put simply, including a pre-approval letter with your offer can help you put a seller’s mind at ease—and that could work to your advantage!

3. It can help you budget

When you’re hunting for a home, setting an accurate price range is crucial. By determining what you can afford and limiting your search accordingly, you’ll save yourself a lot of time. You’ll also avoid the disappointment of learning that a home you’ve fallen in love with is out of reach. The amount you’re pre-approved for is a great starting point for your budget. Once you have a good idea of what your monthly mortgage costs and down payment will be, you can start to create your ideal price range. Of course, no lender will know your current and future expenses as well as you do. That’s why it’s so important to budget on your own, regardless of how much financing a lender is willing to give you.

4. You could lock in a favourable interest rate

When mortgage rates rise, it creates less favourable conditions for home buyers. If this happens while you’re searching for a home, having pre-approval can provide some protection. Your lender will lock in the current rate for anywhere from 120 to 160 days after you’re pre-approved, allowing you to hold onto more of your money if an increase occurs. The best part is, you’ll still benefit if rates go down during your search. Your lender will honour the lower number, which makes obtaining pre-approval a financial win-win for buyers.

5. It’s not an absolute guarantee

While buyers with pre-approval are far more likely to be fully approved than those who aren’t, completing this step doesn’t guarantee you’ll obtain a mortgage. Unfortunately, there are certain circumstances when your financing could fall through. Two common examples include if the property you’re hoping to buy doesn’t meet your lender’s criteria or your financial situation changes after you’ve been pre-approved. To maximize your chances of being fully approved, work closely with your lender. Ask what they’ll need from you at each step (which may reduce unnecessary delays), and try not to take any action that will change your financial situation after you’ve been pre-approved—like leaving your job or applying for a new line of credit.

Ready to start the search for your dream home? To start the process, find an agent who will meet your needs today!