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.
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]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.
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.
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:
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.
Once you’ve been pre-approved for a mortgage, it’s important not to alter any of the considerations that were used for assessment.
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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Find more information on how to buy a home, how to sell your home, and mortgage and finance tips, see our Home Journey How-To’s or sign up at houseful.ca.
This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.
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