If you’re currently saving a down payment or ready to begin house hunting, one thing you’ll need before you can start the process of putting in an offer is mortgage pre-approval. Mortgage pre-approval is how homebuyers can find out how much home they can afford, what their monthly mortgage payments will cost, and how much your mortgage rate will be.
Ultimately, pre-approval allows the mortgage lender to look at your current financial situation to confirm the maximum mortgage amount you can afford and how much interest they will charge you. Mortgage pre-approval is a free process without committing to a lender.
Once you have mortgage pre-approval, you generally have 90-130 days locked in at a guaranteed mortgage rate to find a home you love and begin the buying process. If mortgage rates rise during that period, you will keep your original price. If rates drop, your lender will lower your rate to match.
How do you get mortgage pre-approval?
To get pre-approved for a mortgage, you must verify your financial situation with lenders by providing the following information:
- Identification of who you are
- Proof of stable employment
- Evidence of a down payment and enough money to cover closing costs
- A list of all assets
- Information about current debt and financial obligations
To further prove your financial standing, a lender may look for more specific documentation regarding your current employment, such as a paystub or letter from the employer confirming pay and length of employment.
Regarding debts, lenders will likely want to see financial statements from credit card balances to limits, loans, such as student loans or car loans and any other monthly financial obligations.
The lender will also look at your credit report and history to confirm you are in good standing. Credit scores in Canada range from 300 to 900. If your credit score falls between 600 to 700, you are in good standing to receive mortgage pre-approval. Robert McLister, the founder of RateSpy.com, says that a score of 680 and above will ensure the best mortgage rates.
McLister also notes that at the very minimum, borrowers’ monthly bills, including a mortgage, property tax, utilities and condo fees come to less than 39% of their gross monthly income. All monthly obligations, including debts, should be less than 44% of gross monthly income.
During pre-approval, your financial circumstances must stay the same. Your lender will always have the right to ask for additional documentation.
You must also pass a “stress test.” A mortgage stress test is a confirmation that you are able to make your mortgage payments if or when interest rates increase. The qualifying interest rates for uninsured buyers (homebuyers who put more than 20% down on a home) are based on the Bank of Canada’s five-year benchmark rate or the rate your lender offers plus 2% — whichever is higher. Buyers who put less than 20% down on a home are considered default insured mortgages and must qualify in the same manner. As of 2020, the benchmark rate is 5.14%.
McLister says homebuyers should devote at least two to three hours to a pre-approval process. In total, that time should allow for enough to research good options, speak with a mortgage professional, and submit all of your documents for the application. “The more time you invest in research, the more you’ll save.”
Before you start house-hunting, McLister says you should always get pre-approval and lock in your mortgage rate before you shop. “There’s no sense taking a chance when rates could jump on you costing you thousands,” says McLister.
When and where should you apply for your mortgage?
When searching for a mortgage, it’s crucial to check an honest rate comparison site first. Some great Canadian options include RateSpy, Ratehub and LowestRates. By doing thorough research, homebuyers can find an objective benchmark for rates. Knowing current market conditions can help you negotiate with lenders and brokers.
Secondly, finding a mortgage professional can help you to protect your credit, and also offer you the power of choice when looking for the right lender. Angela Calla, accredited mortgage professional and host of The Mortgage Show, says that seven in every 10 Canadians end up breaking their mortgage early due to divorce, a growing family or a job transfer. For that reason, you need to hire a professional to help protect your investment.
You can obtain mortgage pre-approval at any local bank, credit union or mortgage company. The easiest way to seek mortgage pre-approval is online through a multitude of lenders. Remember, this pre-approval is not a binding contract between you and a lender. Instead, it’s an indicator of your ability to gain formal mortgage approval. Sellers are more likely to take your offer on a home seriously if you have pre-approval.
Calla says that most mortgage professionals may recommend a different lender once a contract is in place, based on the property you choose and your closing dates.
If you have a down payment and closing costs saved, along with a stable job and income that allows you to afford all of your financial obligations alongside a mortgage and housing costs, you can apply for pre-approval at any time. But keep in mind that pre-approval does not guarantee your mortgage application will go through.
If you put an offer on a home and apply for a mortgage, your lender will need to verify that the property meets their qualifications. For example, if a home does not pass inspection or the value of the property is below your accepted offer, they may deny your mortgage.
How do you get mortgage approval?
Mortgage approval is one of the final stages of homebuying. To obtain mortgage approval, you will first need to have an accepted offer in place. From there, Calla says it’s best to have five to seven business days to finalize all details and documents. During that period, your lender will then confirm all of the features in your mortgage application. They may do so by calling your employer to confirm your position or review a property appraisal. Your mortgage advisor will work with the lender to process and finalize approval before transferring funds to the seller.
Once the lender feels the application meets their requirements, your mortgage advisor will send a commitment letter that signifies your approval subject to a few conditions. The conditions include documents to back up your proof of income, employment, assets and property details such as an appraisal. If you agree to all of these stipulations, you can sign the document and start to gather all the necessary information and paperwork.
Finally, you will enter the closing on the property. Your real estate lawyer will prepare all land transfer titles to put the property into your name and register the mortgage. To obtain approval, it’s essential that nothing within your financial life changes during the closing process. Lenders are still able to back out at this point.
Once possession day arrives and you have satisfied all of your paperwork, the funding and loan will be dispersed to all necessary parties, and you can officially call yourself a homeowner.
Mortgage approval may seem like an overwhelming and tedious process, but ultimately, it’s straightforward if you work with the right professionals and stay organized with your financial documents. The more prepared you are, the more effortless the process will be.