What does it actually mean to be prequalified 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 prequalification doesn’t require any financial commitment on your part. However, this does not mean that you should set an unrealistic expectation of what your prequalification 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 notes 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,”
A prequalification 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,” continues Dyer.
“Without a prequalification, 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 prequalification entails
A prequalification can be easily undertaken online and acts as an estimate of what you can afford.
Dyer adds that while this step won’t 100% guarantee that you will be approved by the banks, a prequalification is an easy way to determine the price category that you can shop around in. “A prequalification is based on your monthly earnings, expenses, and any debts that you may have, and the certificate is valid for 90-days,”
“Conversely, if a prequalification 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 says yes 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 prequalification. This acts as proof that you can afford what you’re buying and will be approved by the banks. In a bidding war, a prequalification will help you to stand-out,”
Avoid disappointment: “A prequalification protects you from putting in an offer on a property that you can’t afford and will ten to one be turned down for.”
Home loan applicants who choose to get prequalified through ooba Home Loans have two options available to them:
- Online prequalification using the ooba Bond Indicator: Applicants can register online, have their credit score checked and input their income and expenses. “The benefit of this option is that applicants have a realistic idea of what they can afford in a matter of minutes and they are issued with a prequalification certificate – over 90% of home loan applicants with an ooba prequalification certificate are approved,” says Dyer.
- Alternatively, ooba offers a more in-depth prequalification that mimics the process a bank would follow. “With the help of our home loan experts, an applicant’s credit score, income and expenses are examined. A Qualified Buyer’s Certificate is then issued.” he concludes.
* According to ooba’s statistics, 8.4% of home loan applications are declined due to poor credit scores and 7.7% due to affordability.