A Look at How the Mortgage Pre-Approval Process Works
Are you ready to start house hunting? Hold up! There are still a few things to consider before you start viewing homes.
Before you call your real estate agent, you’ve got to figure out how much you can afford and how much you qualify for.
Chances are you’ve already got a budget in mind, but what you consider your budget to be and what you qualify for on-paper can be two different things given the federal mortgage qualification rules.
Getting pre-approved for a mortgage is a significant first step in the buying process. In essence, a pre-approval confirms the mortgage amount you qualify for. The lender is confirming they are willing to lend you money as long as the property you are buying is satisfactory to them and within the parameters of the pre-approval. This will give you comfort in home hunting while knowing you can get approved for a mortgage.
To see how much lenders are willing to loan you, it’s worth checking in with mortgage brokers in Ottawa. They’ll help you navigate the sometimes-frustrating pre-approval process, and can even work with lenders to help you get better rates than your bank would offer you.
So how do you get pre-approved for a mortgage, then?
How the Pre-Approval Process Works
You can start the mortgage pre-approval process with your mortgage broker up to 120 days before you want to buy a home. However, the exact timeframe depends on how long a lender’s pre-approval is guaranteed. Some lenders may have longer or shorter rate guarantees
This process usually doesn’t take long to complete, but getting it started and finished early can save you from stress while giving a clear budget to work with, letting you start the house hunt sooner!
What You Need to Provide
Lenders are typically looking for the following at the start of the pre-approval process:
- Your photo ID.
- Proof of income such as a letter of employment, pay stubs, T4s, or two years’ worth of Personal Income Tax Returns and Financial Statements if you are self-employed.
- Proof of assets, such as savings, investments, RRSP’s and vehicles, and other real estate.
- Confirmation of liabilities, including child support, car loans, credit card balances, lines of credit, student loans, co-signed or guaranteed loans, and existing mortgages.
- The amount and source of your down payment.
To determine your ability to qualify and your risk of defaulting on a loan, lenders will also look at your credit report and your debt service ratios based on your current monthly income and debt load.
If your debt service ratios are too high, you can:
- Reduce your debts,
- Save for a larger down payment,
- Add a co-applicant, and/or
- Buy a home in a lower price range.
What You Can Expect
Once you’ve been pre-approved for a mortgage, some lenders will provide a certificate or written confirmation as proof of your pre-approval.
The pre-approval guarantees a mortgage interest rate for 90 to 120 days. This means you are guaranteed the interest rate even if rates increase. If rates decrease, you will get the lower rate.
But a pre-approval doesn’t guarantee that you will get a mortgage or the amount of a loan. This guarantee comes later once you’ve included property details and are fully approved for a mortgage.
Your pre-approved mortgage amount will give you an idea of what you can spend on a home. That said, don’t look for the highest-priced home that a pre-approved mortgage amount will cover.
Furthermore, a pre-approval doesn’t mean you are bound to a specific lender. You can shop around for mortgages with your mortgage broker to find the best option for your situation.
Why Pre-Approval Is So Important When Buying A House
The mortgage pre-approval process determines whether a borrower meets a lender’s requirements for a home loan.
If you get pre-approved for a mortgage, the lender sees you as a qualified borrower. This will give you some reassurance that you will be able to buy a home. And it will determine the amount and type of mortgage you can expect, including mortgage interest rates.
The pre-approval is so important because it prepares you before you start shopping for a home.
A pre-approved mortgage gives you an accurate assessment of the amount of money you’ll have so you can find a home that suits your mortgage and budget.
When you get pre-approved for a mortgage, you’ll learn:
- The maximum amount you can afford to spend on a home;
- Your mortgage interest rate for your first mortgage term; and
- Your monthly mortgage payments based on the maximum loan amount.
A mortgage pre-approval speeds up the home buying process since it will narrow down your search based on what you can afford.
You will also already have a file open with a lender when you are ready to buy a home.
A pre-approval shows realtors and sellers that you’re serious about buying a home, which can give you an advantage when it comes time to make an offer.
For sellers, a pre-approval also shows that your financing is less likely to fall through compared to those who don’t have a pre-approval.
What You Need to Watch Out For Once You’re Approved
Once you’ve been pre-approved for a mortgage, you must maintain your financial situation. Drastic changes appear unstable to lenders. Avoid changes to your cash flow, such as loss of employment, changing jobs, or acquiring new debt.
To complete the mortgage application process, you will need to make an offer on a property and include the Offer to Purchase and the property’s MLS listing with your mortgage loan application.
The lender may appraise the property. If you have less than 20% for a down payment, you will need mortgage insurance. As such, a mortgage insurer must also approve the property.
Once your property and financial information is updated, your lender may provide a final mortgage approval.
Lenders don’t consider many expenses that come up when deciding on a loan amount, such as home maintenance costs, daycare costs, and other expenses. This means you could end up borrowing more than you can afford.
To avoid this, find a suitable mortgage that will account for your expenses today and possible situations in the future with the help of a mortgage broker.
Mortgage brokers in Ottawa also have access to a wider selection of lenders. If you aren’t happy with the terms and conditions of some mortgage loans, or you don’t get approved for a mortgage with one lender, your mortgage broker can find a better option for you and your financial situation.