Before you make a big decision like purchasing a home, you may be filled with doubt.
Can you really shoulder the expenses? Is now the right time? Though the real estate market fluctuates from year to year, even season to season, right now is always the right time when it comes to home ownership.
Fortunately, there’s a way to test the waters before ever jumping in. It’s called pre-approval for a mortgage.
Finding out whether you qualify for a mortgage — and, better yet, how much you qualify for — can completely expand and even transform your dream home search.
What is a Pre-Approved Mortgage Anyway?
Mortgage pre-approval is not only easier but faster than the mortgage approval process. It also expedites approval on a mortgage when you’re ready. In other words, a mortgage pre-approval is your true first step to owning a home.
Here’s how mortgage pre-approval works for Canadians:
- Learn about the maximum amount you could qualify for
- Help you estimate your mortgage payments
- Allow you to reverse-engineer a budget that works for all your costs (closing, moving, and ongoing maintenance) without completely stretching your financial resources
What’s even better is that pre-approval can grant you the ability to lock into an interest rate for 60 to 120 days if your lender allows it.
How to Get Approved for a Mortgage
Just like with the mortgage process, you should consider various lenders or mortgage brokers to find the best rate.
Shopping around gives you choices, for sure, but it also helps you settle on the exact mortgage payments that you know you can manage.
The Pre-Approval Process
Your finances will come under the microscope during the pre-approval process. But the good news is that many of the documents you compile will contribute to your future mortgage application.
Check your credit report
Before you consider applying for a pre-approval, order a copy of your credit report and check your credit score. Make sure it does not contain any errors. A potential lender will look at your credit report before approving you for a mortgage.
The easiest way to know about your credit score is by checking it out. And don’t worry—checking your credit score won’t lower it. You can even enjoy unlimited access to your score with TransUnion credit monitoring. Sign-up today and keep on top of your credit with unlimited access to your TransUnion credit report and score.
To get pre-approved for a mortgage loan, you’ll need:
- Proof of employment (Notice of Assessments, current pay stubs, employer letter, your position and length of employment)
- Proof of down payment and the ability to pay closing costs
- Details on your other assets
- Information on debts and other financial obligations
You should also check your credit report and order your own copy before you apply. You can make sure that there are no errors — and you might give yourself a few extra months to boost that score if you need it.
As you can see, the pre-approval process is not about getting your mortgage up and running. It’s about evaluating your financial readiness as a homeowner.
Qualifying for a Mortgage
Often, qualifying for a mortgage goes beyond the applicant’s financial viability. It now starts to extend to the details of the mortgage itself.
At this point, lenders will look at:
- All the documentation from your pre-approval process
- Your total debt load (which shouldn’t be 40% more of your gross income, i.e., total debt service ratio)
- The amortization period of the potential mortgage
- The total monthly housing costs you bear right now (which shouldn’t be more than 32% of your gross household income, i.e., the gross debt service ratio)
Fact: getting pre-approved for a mortgage doesn’t automatically qualify you for a mortgage.
A lender Could Still Refuse You
Some part of their decision also depends on the standards of your target property. In these cases, you have options such as selecting a different property, getting a co-signer, or increasing the down payment amount.
How Long Does Mortgage Approval Take?
In Canada, the mortgage approval process with most major lenders is a quick one. Your evaluation should be over in about 48 to 72 hours. It’s usually the gathering of documents and submission that takes longer.
However, the mortgage approval process may also include something known as a stress test. If the bank is your lender, they’ll run your application and numbers through an interest rate higher than your actual rate.
Will your numbers hold?
Think about getting pre-approved for a mortgage like the golden ticket for your dream home searches. Before you start browsing the digital classifieds for a steal of a home, perform your own “test” application.
Run your numbers through the mortgage evaluation process, including total debt service ratio, gross debt service ratio, and payment terms. The point is not to discourage you but to get a realistic and manageable picture of what you’ve got to work with.
The unfortunate truth is that many homeowners are approved by lenders who shouldn’t qualify them because they cannot truly carry a mortgage burden.
Mortgage pre-approval can help you feel more secure while searching for your dream home. You’ll be surprised how boldly your search expands with pre-approval in your back pocket.
Additional Resources for First-Time Home Buyers
First-time home buyer? You probably have a lot on your mind. Thankfully, the financial sages behind MoneyWizard have got the resources, tips and financial support to help you on your journey!
- Start here! This step-by-step guide includes all the up-to-date information you need to help you make informed decisions and understand the home buying process in Canada… [Read more]
- To make buying your first home more affordable, the government offers numerous incentives— tax benefits, rebates, tax credits, or ways to fund your down payment. Find out if you’re eligible… [Read more]
- While some suggests that you can spend ~32% of your income on housing and still be in good financial standing, not everyone should take this advice. Are you ready to own a home… [Read more]
- Depending on your strategy, successfully saving up for a down payment can be one of the most important steps in securing your financial future. It’s time to take the first step—we’ll show you how… [Read more]
- Lower credit scores attract higher rates—sometimes above ~10%. Regardless, you can still pursue your dream without waiting for your credit score to improve. And the financial sages behind MoneyWizard can help you obtain a mortgage—even with ‘bad’ credit…. [Read more]