Why You Should Remain Cautious Even With Mortgage Pre-Approval
Gearing up to buy a home can be stressful, but one of the ways to help ease that stress is to secure pre-approval for a mortgage. However, once you’ve ticked that box, it’s important to manage your financial behaviour carefully until you actually take possession of the property on the closing date.
With that being said, we will explain the steps to take (or not take) between obtaining pre-approval and taking possession of your new home.
What is Pre-Approval?
Essentially, a mortgage pre-approval determines how much money you would qualify to borrow from a lender. This gives you a clear idea of what your budget should be when looking for a home and adds to your peace of mind when making an offer to purchase.
However, it is important to note that pre-approval is not a guarantee that you will be approved for a loan for that amount. Remember that the final approval is subject to re-adjudication and an acceptable property.
How Do You Obtain Pre-Approval?
To secure a pre-approval for a mortgage, visit a mortgage broker or lender up to 120 days (the typical length of a pre-approval period) before you plan to buy a home and provide all the financial information they request, so they can determine what size of mortgage loan you would qualify for.
What The Process Looks Like
Your mortgage broker will ask you to bring in documentation to prove your:
- Income. Pay stubs, letters from your employer, income tax notices of assessments, etc.
- Assets. Other real estate, cars, RRSPs, and other savings and investments.
- Liabilities. Debts, outstanding loans, and responsibilities like child support.
- The amount of and source of your down payment.Personal savings, gifts, sale of another property, etc.
They will also review your credit report and debt-service ratios (how much debt you have versus your current income). Once the broker reviews all this documentation, they will advise whether or not you are pre-approved and for what amount.
Things To Avoid After Obtaining Mortgage Pre-Approval
Once you get the good news that you’ve been pre-approved, keep in mind that it is conditional on your financial situation staying the same. That means you should not do anything to negatively affect your finances between the time that you are pre-approved and when you receive approval for your mortgage. Here are some examples of things you should avoid.
Applying For New Credit
When you apply for a new credit card, loan, or line of credit, your credit ratingwill likely be affected, especially if you’re adding new debt like taking on a loan (or even co-signing one for someone else). Your debt service ratios will also change, which can be a red flag for lenders and lower the maximum purchase price you qualify for.
Missing Credit Payments
Your credit score is incredibly sensitive to missed payments, and they stay on your credit history for up to seven years. So, don’t take any chances –set up reminders and pay all of your credit card and utility bills on time (or early), not just during this period of time, but all the time.
Making Large Purchases
Now is not the time to buy a new car, a gigantic TV, or anything else that will significantly reduce either your cash on hand or your available credit. Lenders want your savings amount and debt-to-income ratios to stay the same as when you were pre-approved. And they willcheck – definitely at the time you make an offer and maybe again just before your closing date.
Leaving Or Switching Your Job
If you’ve already provided proof of employment and income, but then you change jobs, your income might also change. If you quit or lose your job, your income is no longer assured. In that case, a pre-approval could be significantly reduced or even revoked.
Not Keeping a Record/Paper Trail For Big Deposits
Lenders ask about your savings and your down payment because they want to know that you have the cash on hand. Big deposits with no explanation could indicate that you’ve borrowed money from someone (increasing your debt) without wanting it recorded officially. So, by all means, deposit cash if you’ve got it, but make sure you can explain where it came from (such as another savings account or an inheritance).
Not Responding to Lender Requests
If your lender asks for additional documentation or an explanation of something they see happening with your accounts or credit rating, be sure to respond as quickly as possible and provide the requested information. You could jeopardize your pre-approval if you give them reason to believe you’re hiding something or are not fully organized.
A mortgage pre-approval is an excellent and logical first step toward securing a mortgage on your new home. But it’s not a watertight guarantee that you’ll be able to borrow that amount once you find a property you want to buy. The best way to hang onto that pre-approval is to keep your financial situation locked down and stable, provide all requested documentation, and don’t make any big changes to your lifestyle or spending before you buy your home. Our team of experienced mortgage brokers can get you started on the path to pre-approval.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.