Why Mortgage Pre-Approval is a Good Idea
There’s a critical step that makes the house hunting process easier, which will also save you time: getting your mortgage pre-approved. Pre-approval defines how much you can afford to pay for a house, which has the effect of focusing your home search because it enables you to set a budget for the purchase of your home. You’re now likely to only look at homes that are within your price range.
You’ll get quicker, more targeted service from your real estate agent, who will take your pre-approval as an indication that you’re serious about purchasing. Also, when the time comes to make an offer on a house, the fact that you’re pre-approved hints to the seller that you should have no difficulty funding the purchase, which will improve your odds in a competitive offer situation.
Pre-approval also lets you “lock in” the best mortgage rate. This is a great boon, especially if rates go up as you continue your search for a home.
Mortgage Pre-Approval Defined
Mortgage pre-approval is the process that gives you vital information to assist you in your search for a home. You’ll learn the following after you receive pre-approval for a mortgage:
- How much house you can afford
- What your monthly mortgage payments are likely to be
- Your interest rate for the first term of your mortgage
Requesting pre-approval for a mortgage is free and it does not obligate you to choose any single lender. Getting a pre-approval, on the other hand, guarantees that the rates that the lender is offering you will not change for 120 to 160 days. You’re shielded from rising interest while you shop for your new house by this “locking in” of your rate. If interest rates are reduced during the locked-in period, lenders will usually honour the lower rate.
The Pre-Approval Process: How it Works
You must meet with either a lender or a mortgage broker in order to get pre-approval for a mortgage. They will ask you a sequence of questions to establish the amount you can comfortably borrow to finance your new home, and you will be required to present some supporting documents.
As a gauge of the health of your finances, your credit score measures the risk of lending you money. You can get a mortgage from an “A” level lender (major banks), if you have a credit score that falls between 680 and 900.
Lenders will look at the other particulars of your finances to decide whether or not you can qualify with an “A” level lender if your credit score falls between 600 and 680. If you do not qualify, the next step is to get a mortgage pre-approval from a “B” level lender, for example, a Home Trust.
You can only get a mortgage with a “B” level lender if your credit score is under 600, and you will not have access to today’s best mortgage rates.
The deposit you’ll make towards buying your home is known as the down payment. The minimum for a down payment in Canada is 5 percent of the purchase price of the house. You’ll be required to purchase mortgage default insurance if your down payment is less than 20 percent in order to safeguard you lender if you run into trouble and can’t make regular payments on your loan.
The amount of your down payment has an impact on how much you can borrow. If you want to purchase a house for $150,000 for example, you’d need a down payment of at least $7,500.
The minimum for a down payment for any home sold in the $500,000 to $999,999 price range increased in February 2016. Buyers have to pay down 5 percent of the first $500,000, and 10 percent of the excess. A house that’s being sold for $700,000, for example, will now attract a minimum down payment of $45,000.
Debt Service Ratios
Your monthly income, current debt, and expenses define the ratios of your debt servicing, which are used by lenders to establish how much you can afford to pay on your monthly mortgage. Lenders get the assurance that there’s a smaller risk of you defaulting on your mortgage payments, since the ratios are calculated in such a way as to determine whether you can afford pay for your home, taking into consideration all of the other financial obligations you may have.
The documents you will need to present for your pre-approval can vary; depending on the lender or mortgage broker you go to. For instance, there are mortgage brokers who won’t ask for proof of income until a home seller accepts your bid and you’re about to make the application for your mortgage final, while others require it for pre-approval.
Here’s a list of the documents you might need to present in order to get your mortgage pre-approved:
- Picture ID
- Proof of income (job letter and pay stubs, or if you’re self employed, you can present a notice of assessment)
- Amount of time spent working with current employer
- Proof of other assets such as a cabin in the woods, a boat or a vehicle
- Proof that you’ve made the down payment
- Proof that you have the financial capacity to take care of closing costs (you can use recent bank statements, or you can also present a statement from your brokerage firm if you have investments in other financial markets).
- Information about any other financial commitments including:
- Child support or spousal payments
- Lines of credit or credit cards
- Car loans or leases
- Student loans
- Personal loans
Limitations of Getting a Pre-Approval
Always remember that getting pre-approval for a mortgage does not guarantee that when you make your final application it be accepted. Lenders usually examine the property details after your Offer to Purchase has been accepted to ensure it’s suitable. You won’t be approved for a mortgage on a property that does not meet their conditions for qualification. If the house has asbestos for example, or knob and tube wiring, or its assessed value is lower than the price you’re being asked to pay, or it’s a heritage home, the lender might find it unsuitable and refuse you a mortgage.
A pre-approval for a mortgage also does not mean that you should look for a house at the high end of your price range. Pre-approval is not a measure of the amount you should spend, but rather it tells you how much you lender is willing to fund you. You can opt to purchase a home at a price that’s lower than your maximum spending limit, and this will ensure that you have enough space in your budget for paying back outstanding debt and for saving.
The Mortgage Approval Process: How to Get Approved for a mortgage?
The mortgage approval process is the key step in your home purchase. You’ll start the process after you’ve given the homebuyer an Offer to Purchase and he or she accepts it, that is if you weren’t already pre-approved. You must get a mortgage approval prior to moving forward with buying your home since your Offer to Purchase will be provisional pending financing.
The process is comparable to getting pre-approved: down payment and income details must be provided to your lender or mortgage broker, accompanied by precise details of the house you’re purchasing. You may be required to provide the following:
If the funds are coming from your Home Buyers’ Plan, you will need proof of withdrawal from your registered retirement savings plan. Investment and savings statements from the previous ninety days will be required if you’re using your own funds. Finally, if a member of your family is helping to fund your down payment, you will need a letter affirming that the money constitutes a gift and not a loan.
Payslips, a statement of reimbursement paid (T4) or a signed letter from your employer may be needed to verify income. Freelance and rental income, and dividends and other rental income must be declared as well.
Your lender will need an inventory of your current liabilities and assets. He or she will also need the deposit amount that stated in your Offer to Purchase, and a cancelled cheque for setting up mortgage payments.
The lender will also need details such as the closing date and the location of the home. You’ll also need to supply a copy of the listing, and estimates for condo fees, property tax, and heating cost. In addition, you will be asked to produce copies of the home inspection or land survey, and the accepted Offer to Purchase contract, including the exact purchase price. Finally, your lender will need to know the name, address, and telephone number of your lawyer.
Your lender or mortgage broker will forward the application to one of the underwriters at the financial institution once you have provided all the details. They will use debt service ratios to establish if your application meets their standards. The usual turnaround to approve a mortgage is between four and eight hours.
What to do if Your Application is Rejected
There are a few things you can do if your application for a mortgage is rejected:
- Get a parent or other relative to act as guarantor and co-sign the application for a mortgage
- Seek a mortgage with a private lender or a trust company. These companies focus their business model on lending to homebuyers who can’t use the services of a mortgage broker, or who do not qualify to get a mortgage from a conventional lender such as a credit union.
- Speak to an independent financial advisor specializing in mortgages, or a professional mortgage broker. They deal with a broad selection of lenders and should be able to offer further advice on what approach you should take.