How to prepare for mortgage pre-approval
Getting pre-approved for a mortgage is an essential first step in the homebuying process. Securing pre-approval before you start touring homes can help you filter out homes beyond your price range, show buyers you mean business, and ensure you’re able to move quickly once you find a property you like. Let’s walk through how to prepare for a mortgage pre-approval so you know what you expect.
What is mortgage pre-approval?
The mortgage pre-approval process offers security for lenders and helps determine how much you’ll be able to borrow when you’re buying a home. Mortgage lenders use the pre-approval process to establish your interest rate, let you know the maximum mortgage amount you qualify for, and to define your monthly mortgage payments. This process doesn’t guarantee you the mortgage, but it provides a clear outline of what you’ll qualify for if your finances remain consistent. It’s also a great tool to help show buyers you’re serious and financially competent when you make an offer.
[See also: Difference between pre-approval and pre-qualification]How can I prepare for mortgage pre-approval?
The home loan pre-approval process includes consideration of your credit score, debts, income, and assets. Before you begin the process, get your finances in order and use an online calculator to help establish whether you’d be able to qualify for a mortgage. If you’re thinking ahead to home ownership in a few years, now is the time to make a plan to improve your credit, pay off debts, or move towards a more consistent form of income. When you begin looking for pre-approval, take time to explore different lenders and compare rates.
Where can I get a mortgage pre-approval?
Mortgage lenders like banks, credit unions, mortgage companies, insurance companies, and loan companies can lend money directly to you. Compare options and interest rates and make sure you talk to a variety of lenders to choose the option that suits you best.
Mortgage brokers help you navigate the process by finding a lender for you and assisting you in comparing lenders. Some brokers will have access to lenders that you wouldn’t be able to access independently, so ask brokers which lenders they work with when you’re considering doing business with them. Mortgage brokers don’t typically charge up front for their fees, and receive a commission once a mortgage is secured. You can find a local mortgage broker using the Mortgage Professionals Canada directory.
What documents do I need to prepare for a mortgage pre-approval?
Each mortgage lender has different qualifications, but a pre-approval typically requires a credit check, proof of income and assets, and an analysis of any debts. Once you’re ready to begin the process, you’ll need to collect the necessary documents. If you have a mortgage broker, they’ll be able to help you get organized. These are the kinds of documents typically required by lenders or brokers for pre-approval:
- Proof of income: This may include a letter of employment, pay stubs, or a record of deposits.
- Identification: This could include a passport, driver’s licence, or other proof of identity.
- Debt information: Loan officers will want to know about money you owe and monthly debt payments, including student loans, credit cards, lines of credit, child or spousal support, and car loans. This includes debt to income ratio, so be prepared to disclose your monthly debt payments along with owed amounts.
- Banking statements: To demonstrate proof of income and balance of accounts.
Tips for home loan pre-approval
- Be transparent and open during the process. Lenders are good at finding out the truth. If you try to hide debts or exaggerate assets, it’ll reflect negatively on you when the truth is revealed in a credit search.
- Anticipate surprise costs like moving costs, closing costs, repair, and maintenance costs and factor this into the money you’re expecting to spend.
- During the pre-approval process, ask your lender how long the rate is secured for, if the pre-approval can be extended, and whether you’ll be offered a lower interest rate if rates drop following pre-approval.
What is a mortgage stress test?
To qualify for a mortgage at a Canadian bank, you’ll need to pass a “stress test.” Private lenders and non-federally regulated credit unions aren’t required to do a stress test. This test requires you to prove that you could afford payments that are higher than your current interest rate. This test is designed to ensure that you’d be able to afford your mortgage in the event of changing interest rates, loss of employment, or economic downturn. To do this, the bank uses an interest rate of 5.25% or the interest rate negotiated with your lender plus 2%. Loans from a bank require this test even if you’re not required to get mortgage loan insurance.
What should I avoid doing after mortgage pre-approval?
Once you’ve been pre-approved for a mortgage, it’s important not to alter any of the considerations that were used for assessment.
- Don’t apply for new credit cards or loans during this time, or co-sign for other people’s loans. Doing so could affect whether you still qualify for your pre-approved amount.
- Avoid increasing debts, like spending money on credit cards or taking out additional loans.
- Keep your employment status consistent and don’t change jobs until you’ve secured your new home. Consistent employment income is an important consideration in the mortgage pre-approval process.
What should I do once I get pre-approved?
Your pre-approval documents will outline the specific terms of your pre-approval, including the mortgage amount and approved interest rate. Once you have your home loan pre-approval, the rate can be held for 60-130 days. Calculate how much home you can afford to make a financial plan. Just because you’re approved for a certain amount doesn’t mean it makes sense for your budget. Consider monthly costs, closing costs, and other expenses to consider the right price margins for your new property. Now it’s time to start exploring!
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