Before you start looking for a new house, there is an important step you can take to make the process go smoother and save you time – getting pre-approved for your mortgage. Getting pre-approved means that the lender you are working with has agreed to lend you a certain amount of money for your mortgage. This helps determine the price range you can afford and helps narrow your search for homes.
What is a mortgage pre-approval?
Mortgage pre-approval is a process that helps you determine the maximum amount you can afford to spend on a house, the monthly mortgage payment associated with your maximum purchase price, and what your mortgage rate will be for the first term.
Mortgage pre-approval does not commit you to a single lender. It does, however, guarantee you the rate offered by the lender for 120 to 160 days following the pre-approval. This means that if interest rates go up during your shopping period, you will be protected. If interest rates go down during the shopping period, the lender will give you the lower rate.
Getting pre-approved for your mortgage helps you in your home search in many ways. First of all, it will save you time it your search because you will know what you can afford, and look at homes accordingly. Getting pre-approved will also help you get faster and more targeted service from your real estate agent, as it signals you are ready to buy. Getting pre-approved also lets the seller of the home know that you should have no problem financing the purchase when you make an offer.
How to get pre-approved
To get pre-approved, you will need to meet with a mortgage broker or a bank. To help determine what you can afford, they will ask you a series of questions, and you must provide documentation to support your answers. Lenders use three factors to determine how much money they will lend you:
- Credit score: Your credit score measures your financial health and illustrates how risky it is to lend you money.
- Down payment: The down payment is the lump sum of money you will pay at the time of purchase. The size of your down payment affects how much you can borrow, and the type of mortgage you qualify for. In Canada, you must make a minimum down payment of five percent of the value of the home. If your down payment is under 20 percent, you also need to pay mortgage default insurance.
- Debt service ratios: Debt service ratios are two calculations that determine the largest monthly mortgage payment you can afford. It is based on your current income, expenses, and debt.
Depending on which institution you go to for pre-approval, you will require different documentation. Some common documents you will need to provide are:
- Identification (driver’s license, passport)
- Proof of income
- Proof of down payment ability and closing cost payments
- Length of time with employer
- Proof of any other assets, such as a car, boat, or cottage
- Information about debts
A mortgage pre-approval does not guarantee that your final mortgage application will be approved. When you apply for your mortgage after you offer on the home has been accepted, the lender will review the details of the property to ensure it is suitable. If it does not meet their qualifications, you will not qualify for a mortgage.
It is also important to note that getting pre-approved for a mortgage does not mean you should buy a home that is at the top of your price range; it merely represents the maximum amount that the lender is willing to lend to you.