new home

How Mortgage Pre-approval Works in Canada

Buying a home is a momentous occasion for you and your loved ones. However, there are many hurdles to scale which makes the process increasingly difficult – especially where you have to secure a mortgage. And that’s the reason you have to seek mortgage pre-approval before you go house hunting. In fact, it is vital you do so because you cannot know what houses you can afford without pre-approval. Also, mortgage pre-approval allows you to ‘lock-in’ rates which may increase when you’re looking to actually pay for a home.

By now you should have an idea what mortgage pre-approval is all about. If you don’t, pre-approval is a process whereby a lender qualifies you for a mortgage loan after you’ve provided all the necessary information including income and credit history. Without mortgage pre-approval, purchasing a home would be difficult or downright impossible. Some of the information you’ll find out include:

  • The money you can access from your lender for your mortgage
  • The monthly payments for the money you borrowed (principal + interest)
  • Your mortgage rate for the first tenure of the mortgage

You don’t have to pay for pre-approval and you’re not obligated to seek mortgage pre-approval from a single institution.

Importance of Mortgage Pre-approval

There are many reasons to seek mortgage pre-approval. Some of them are:

  • Saves you valuable time house hunting as you’ll only focus on houses within your pre-approval range.
  • Pre-approval signifies a statement of intent to the seller you are serious about purchasing your home who offers you the best price for the house.
  • Pre-approval helps you lock in your rate so you don’t have to pay more should the rate increase.

Pre-approval Requirements

Although you can seek mortgage pre-approval online, it is better to consult your lender or broker in person. The buck stops at their desk to determine the amount of money you can borrow. They do this by asking giving you a few questions as well as requesting for supporting documentation. Some of the mortgage pre-approval requirements include:

  • Your credit score

Your credit score shows at a glance your financial status and whether it is worth the lenders while to finance your home. A credit score within the range of 680 to 900 will qualify you for the best rates, usually an “A” rating with a major lender. Any other score below 680 and you’d need to qualify under a “B” rating like Home Trust. Any score less than 600 will end your dreams of getting the best current rates.

  • Down Payment

The down payment is the upfront cash you put towards buying your property. The down payment is crucial for your mortgage pre-approval. Canada has a minimum down payment of 5%. Any sum less than 20% of the property value, and you’d have to purchase mortgage default insurance which protects your lender in situations where you default on the loan.

  • Debt Service Ratios

Whatever amount of money you borrow, the lender has to ensure you will pay back. Debt service ratios give the lender critical information about your financial status like the maximum monthly payments you can afford based on your current earnings.

  • Supporting Documentation

The documents you must provide may differ depending on the lender. For instance, some financial institutions require a statement of your income before pre-approval while others wait until the mortgage application. Nonetheless, these are a few documents you may have to provide:

  • Identification documents
  • Employment history
  • Proof of income
  • Proof of assets
  • Debts and other expenses like:
  • Credit cards
  • Alimony or child support payments
  • Personal loans
  • Student loans
  • Car loans

After Pre-approval

You must understand at this point mortgage pre-approval is no guarantee you’ll secure your mortgage. After you’ve sent in your Offer to Purchase, the lender has to conduct due diligence on your potential home to make sure it meets their requirements.

If the property does not, your mortgage application will be rejected. For instance, the building materials aren’t considered safe, or it has an estimated value that is less than the purchase price. Also, qualifying for pre-approval is not a license to purchase a property at the very limit of what you can afford. The pre-approved sum signifies how much you can borrow from your lender rather than what you’re allowed to spend. It is always good to purchase a property that’s lower than the maximum approved amount so there’s space in your budget to carry out other responsibilities.

Mortgage Pre-approval Tips

Mortgage pre-approval is not a difficult process, but there’s always a possibility you can shoot yourself in the foot. Below are tips to ensure you’re not only pre-approved, but you get the best rates for your mortgage.

  • Apply first

Many Canadians make the mistake of looking at houses as the first step to purchasing a home. That’s putting the cart before the horse, which is wrong. The first thing you need to do is seek mortgage pre-approval. Because once you find your perfect home, you’d need to close as quickly as possible. Pre-approval allows you to streamline your search, going for homes that fall within your “bank approved” range.

  • Don’t commit

As with many things in life, you have to do what’s best for you. No matter how much you’re being sweet-talked by the lender who will most likely promise you the best deals ever (rolls eyes) never commit to any one lender. Carry out research and visit as many financial institutions for the best rates.

  • Organize your documents

Assembling the documentation for your mortgage pre-approval can take a while so start on time. Consult your broker for the required documentation as listed above.

  • Stay in touch

Once you begin the pre-approval process, stay within your phone’s reach. Avoid trips where you can’t have access to electronic communication. Your unavailability will signify a lack of interest or commitment which may get your application rejected. If you have to travel, inform your lender or lender beforehand.

  • Read everything

After getting pre-approved, you’ll be given a pre-approval document containing the terms of your pre-approval. It’s vital you read everything or better still, contact your accountant or lawyer to look at the document on your behalf.

  • Pre-approve below your budget

You shouldn’t use the maximum pre-approved amount as your price range. Seek mortgage pre-approval that’s below your budget so you end up paying for what you can afford.

  • No big purchases

Unless you can afford it, it’s not advisable to consider buying a car at the same time you’re seeking pre-approval. The same goes for major purchases. These big purchases can leave a big dent in your financial statements thereby affecting your debt service ratios.

  • Maintain your employment

Having stable employment is a key cog in getting pre-approved and securing your mortgage. You should only change jobs if it’s worth it, for instance, getting a substantial pay raise.

  • No new credit

Because you’re trying to manage your debt, now is not the time to take on fresh loans, and this includes new lines of credit. Taking on extra debt can affect your chances of getting pre-approved.

Final thoughts

Mortgage pre-approval is not a guarantee your lender will approve your mortgage application. But adhering to the tips above will ensure you’re one step closer to purchasing the home of your dreams.

Leave a Reply

Your email address will not be published. Required fields are marked *