How to Get Pre-Approved For A Mortgage in Canada
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Did you know that one of the biggest mistakes homebuyers make is looking at rates or making offers without fully understanding how much they can qualify for? This is a key step in ensuring the rest of the mortgage loan process goes smoothly but is oftentimes overlooked. However, since you’ve landed here, you don’t have to worry about that! You’ll be armed with exactly what you need to know about getting pre-approved for a mortgage and all the reasons it’s necessary to do so!
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What Is A Mortgage Pre-approval?
A mortgage pre-approval is a more comprehensive evaluation considering all your financial details. You can secure a rate for up to 120 days by obtaining pre-approval. It’s worth noting that if you apply for pre-approval, there is no impact on your credit report.
During the homebuying process, a mortgage pre-approval can play a pivotal role. Pre-approval indicates a lender has reviewed and approved your mortgage loan application based on your provided information and is subject to certain conditions. It will often indicate information such as terms, interest rate, and principal amount. Although not mandatory, it gives you a clearer picture of the house you can afford.
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Mortgage Pro Tip: Skipping the pre-approval step when applying for a mortgage could increase the risk of not being approved by a lender. Realtors and sellers often recommend getting fully pre-approved to minimize the possibility of your mortgage application being denied, which could cause delays and hinder the sale.
What Is A Mortgage Pre-qualification?
A mortgage pre-qualification is a simple financial assessment, and it’s based on the self-assessed information you present to the lender. They’ll only need to confirm your address, identity and income.
The verification of these details is usually quite loose and varies between lenders. Since it is only an assessment, the mortgage expert will ask questions about your financial position (savings, downpayment, debts) to see if they make sense for your employment and age.
Many smaller lenders do not offer pre-approvals because they have limited funds. Instead of holding a rate for a potential client that may not return, they use those funds to provide mortgages for their clients.
These lenders, usually not the big banks, prefer to keep their best rates for live applications (accepted offers) and won’t offer pre-approvals – instead, they may offer a pre-qualification.
Pre-Approval Versus Pre-Qualification
Pre-approvals and pre-qualifications are similar in that they occur before you accept an offer on your prospective subject property.
What differentiates the two is that pre-qualification does not require the lender to hold a rate for you; whereas the pre-approval does.
Some lenders and brokers may present these opposingly, but the idea is the same: they gauge your ability to carry a particular mortgage.
A pre-qualification is much simpler as it’s based on self-reported data, whereas a pre-approval is based on variable data.
Pre-approvals require more documentation to be presented to the lender – almost as much as getting approval – except for documents related to the property or contact information for your solicitor.
Both of these processes are generally conducted before you make offers on properties. Neither process guarantees mortgage financing since the property, once found, would need to be evaluated alongside all the property details to ensure lending ratios (LTV, GDS and TDS – We’ll go over these three lending ratios in detail).
The complete mortgage approval process may be finalized upon receiving your accepted (typically conditional) home offer. Your nesto mortgage expert will help with the remainder of the details, outlining all closing costs and necessary documentation to finalize your fully-approved mortgage application. The basis of your final approval depends on your financial information, provided documents, and the quality and condition of the home you are purchasing.
Important note: A pre-qualification or pre-approval does not guarantee approval from a lender. However, it will give you a good idea of your potential approval amount, allowing for more confident house shopping.
Where Can You Get Pre-approved For A Mortgage?
You could obtain your mortgage pre-approval by going to a lender directly. Many entities, like banks or financial institutions, mortgage finance companies (MFCs), mortgage investment corporations (MICs), or alternative/private (also called subprime) lenders, could underwrite your mortgage and provide a pre-approval.
You could also obtain your pre-approval through a mortgage expert, such as an agent or broker, specializing only in mortgage financing. They are considered middle people who deal with multiple lenders, helping you find a suitable solution. Mortgage brokers generally will not charge a fee since they receive a healthy commission from the lender.
It is essential to review your credit score well before considering homeownership to see which type of lender or mortgage financing would be most suitable for you.
Suppose you have an excellent credit rating or less than 20% downpayment (net of debts). In that case, you should consider a mortgage finance company first, as you’ll be able to access their exceptionally lower rates.
On the other hand, if you’ve got a low credit score but have access to a 20% or more downpayment (net of debts), then you should consider a mortgage broker who will have access to both prime and subprime lenders and the ability to place you wherever you’ll qualify.
Lastly, if you have a low credit score (lower than FICO 650) and less than a 20% downpayment (net of debts) saved up, you’ll need to improve your credit to have a manageable mortgage payment with a lower mortgage rate.
Important: Shopping around for the best mortgage option during your pre-approval stage will not affect your credit score, as lenders will pull a soft credit check which does not remove points from your credit score.
Learn about different types of lenders or how to improve your credit score. Perhaps you’re looking to buy a home as soon as possible. There are some options on how you might be able to get a mortgage with bad credit.
Mortgage Pre-approval Considerations
The main things to consider in the mortgage pre-approval process are:
- Look for the best rate possible. Explore different vendors and rates,and find a realistic and appealing mortgage. Factors like your down payment, amortization, and whether you should choose a fixed or variable interest rate will significantly impact your monthly repayments.
- Be conservative with your budget. You don’t necessarily have to purchase a home at the upper limit of your pre-approved amount. Remember, you’ll also need to budget for closing and moving costs, plus any repairs and upkeep for your new property. Budget for surprises and closing cost overlays such as independent legal advice or a home inspection (always recommended).
- Appraisals can be their worst enemies. The amount you settle for your home purchase is not the property’s final valuation. The lender will complete due diligence to confirm the price; if the lender is unsatisfied, they will request an appraisal. An appraisal that comes lower will dictate your mortgage financing amount – as the lender will use the amount less your downpayment to confirm your qualifying mortgage amount.
- Consider the stain of homeownership on long-term plans. Contrary to what you’ve been told, you can’t simply buy a home and make payments hoping you’ll be able to use it one day to live on in retirement. Assess your post-purchase budget, be sure you have enough cashflow for discretionary spending or long-term investments. Set aside money for repairs and maintenance so you’re not caught off guard if something costly is needed (for example, your roof leaks or your condo board issues a special assessment).
- Do not make significant changes that could impact your finances. It’s not a good idea to make significant purchases, change jobs, or take on large amounts of credit before you have received final approval from your lender or broker. Even after a successful pre-approval, significant financial changes could reduce the likelihood of getting your mortgage approved.
Mortgage Financing Documentation
Mortgage financing requires a slew of documentation at each step. There is a big difference between the documentation needed for pre-qualification, pre-approval or mortgage approval. This section will discuss the documents needed for each process and why.
Documents Needed to Complete a Mortgage Pre-Qualification
As mentioned earlier, the documents needed for a pre-qualification list are concise. Some documents verify your details, while others confirm the same during the pre-qualification. Your lender or broker is looking to confirm the details that you presented that were presented in your application.
|Paystub(s)||Income & Employment (Personal)||Understand the income/employment used to qualify for a mortgage.|
|Statement of Remuneration (T4s)||Income & Employment (Self-employed or Incorporated)||Understand the income/employment used to qualify for a mortgage for someone who is a sole or partial company owner.|
|Drivers Licence / Passport + 1 other||Identity.||Confirm identity and that the applicant’s and their name match as presented in the application.|
If you’re separated or divorced, you won’t be asked to provide your separation or divorce agreement (for spousal or child support).
However, your mortgage advisor will still need to confirm if you have any obligations to list as a part of your regular debt repayments. If you receive child or spousal support, you’ll need to add this to income, and primary proof may be required, such as a bank statement to show it’s being deposited into your bank account.
Documents Needed to Complete a Mortgage Pre-Approval
|Paystubs||Income||Understand the income/employment used to qualify for a mortgage.|
|Statement of Remuneration (T4s)||Bonus Income||Understand that bonus has been received in two consecutive years and use the average to qualify.|
|Letter of Employment (LoE)||Employment||Confirm the salary, time on post and job title, etc.|
|Notices of Assessments||Commission or Self-Employment Income||The 2-year average is used for qualifying income.|
|Financial Statements||Corporate Income||Confirm that your corporate income source makes enough revenue to duplicate your personal income used for qualification.|
|Corporation Income Tax Returns (T2s)||Corporate Income Taxes||Confirm no corporate taxes owing.|
|Business License||Registered Business Name||Confirm if a sole proprietor is registered under a name different than their personal name.|
|Business Account Statement(s)||Business Income||Confirm the duplication of employment income when clients are self-employed.|
|Separation Agreement||Spousal or Child Support||Confirm the income or obligations under the separation. It will require 2 months’ bank statements to confirm if income.|
|Universal Child Care Benefit Statement||Federal Child Tax Benefit||Confirm child tax benefit. It will require 2 months’ bank statements and birth certificates for children under a certain age who are the UCCB beneficiaries.|
|Drivers Licence / Passport + 1 other||Identity.||Confirm identity and that the applicant and their name match as presented in the application.|
Documents Needed To Complete A Mortgage Approval
As with many stages of the homebuying process, you must submit several essential documents for the final mortgage approval to provide proof of finance. At this stage, the lender seeks to validate all details related to the borrower’s income(s), downpayment, closing costs, and the purchased property.
This is not an exhaustive list, these documents are needed in addition to those we listed for pre-approval documents:
|Bank Account Statements||Incomes||Receipt of different incomes.|
|Business Account Statements||Business incomes||Receipt of self-employed incomes.|
|Savings Account Statements||Downpayment and closing costs.||90-day validation of downpayment and closing costs.|
|Deposit Cheque Copy||Part of the downpayment was made to secure the purchase.||Deposit made to the lawyer’s trust (a third party to reduce the risk of fraud) as confirmation of the purchase undertaking.|
|Investment Statements||Downpayments and closing costs.||90-day validation of downpayment and closing costs.|
|Purchase Agreement||The purchase price, property details, closing date, conditions and stakeholders.||Confirm conditions, dates and values required to make mortgage closing go smoothly.|
|Notice of Fulfilment||Outstanding conditions completed.||A waiver once conditions listed in the purchase agreement have been satisfied.|
|MLS||Confirm publicly listed property with taxes and property details.||Secondary confirmation of the real property for sale and match property details to the purchase agreement|
|Appraisal||Property value and condition||Confirm property is in conditions that meet the lender’s requirements.|
|Status Certificate (Condo only)||Maintenance fees, reserve fund, insurance and legal issues.||Confirm that a condo corp and board’s legal position, the reserve fund, insurance coverage, and maintenance fees are in good standing.|
|Void Cheque||Bank account for mortgage payments.||Confirm the bank account belongs to the borrower who will be on the mortgage and set up an automatic payment plan for the mortgage.|
|Stakeholders||Realtor and real estate lawyer’s name and contact info.||Confirm the details of the professional you’re working with.|
Important: If you’re new to your position or employer but past your probation period, you may also be required to submit similar information from your previous place of employment. It’s strongly recommended that you hold off switching employers/jobs until your mortgage closes. Lenders may not consider income within your probationary period. There are exceptions, but why risk your mortgage approval on a hunch? In the same vein, avoid making large purchases on credit that may affect your credit limit or qualify for new credit. This will help your mortgage experience run a lot smoother.
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Your Options If Your Mortgage Is Not Approved
The mortgage financing approval process is rigorous and for a good reason. Lenders must evaluate your ability for repayments and the risk that you pose for them.
Getting your mortgage application rejected can be a downer experience, especially if you have already found your dream home and are counting on the loan to secure your purchase.
However, a mortgage refusal doesn’t necessarily mean the end of your homeownership dreams.
The first step towards finding an alternative solution is understanding why your mortgage application was declined. Lenders expect borrowers to meet specific requirements, such as minimum credit scores, stable employment, and sufficient income and assets.
Once you know why your mortgage was not approved, you can address them and work on improving your financial situation.
If your income is insufficient to qualify for your mortgage amount, consider adding a strong guarantor or co-signer to your application to decrease your application’s risk status to the lender. It’s often worth seeking alternative mortgage options, such as specialist lenders or credit unions, that may have different lending criteria or be more willing to take a chance on you.
Your credit score plays a vital role in your mortgage application, and a low score can be a red flag for lenders. If your credit score is less than ideal, improve it before reapplying for a loan. This might include paying debts, avoiding new credit applications, and checking your credit report for errors or mistakes. Improving your credit score may take time but can significantly affect your ability to secure mortgage approval.
You may need to consider waiting and saving until you meet the lender’s criteria. This may involve putting off your homeownership plans for a while, but it can also give you more time to improve your credit score and increase your chances of approval or save up for a higher down payment. Buying a home is a significant financial decision; rushing into it without adequate preparation can lead to costly mistakes.
Some of the most common reasons that get in the way of an outright mortgage approval revolve around eligibility and risk level. Ask your mortgage expert about other types of lenders if you’re turned down for a mortgage. Subprime (alternative and private) lenders have different lending criteria from more prime (traditional) lenders, including easier qualification requirements and longer amortizations.
Frequently Asked Questions
Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.
What is the difference between mortgage pre-approval and approval?
The final mortgage approval is based on rigorous verification and validation of your financial position (income, downpayment and creditworthiness with a hard credit check) and the ability to carry a mortgage on the subject property you’ve been accepted to purchase. The pre-approval is not specific to a property, only requires a soft credit check and does not guarantee your approval.
What is the difference between mortgage pre-approval and pre-qualification?
A mortgage pre-approval is a financial assessment based on documentation that verifies income and identity with an understanding of the assets and validates creditworthiness through a soft credit check. A pre-qualification is similar, except the lender does not place a rate hold or guarantee your qualification amount for a set period – say 60, 90 or 120 days.
When is a mortgage pre-qualification more suitable than a mortgage pre-approval?
A mortgage pre-qualification is more suitable than a mortgage pre-approval for more creditworthy and fiscally responsible individuals looking for an assessment to understand their qualifying mortgage amount but plan on staying well below that amount. It’s also recommended when the mortgage rates are receding, or the market is fast-paced.
Getting pre-approved or pre-qualified for a mortgage is vital when purchasing a home. Understanding the amount you can borrow and what you can afford through these assessments is a key first step. Knowing your financial limitations and constraints can help you focus your search on targeting homes suitable for your budget. These valuable assessments also prove helpful, making homebuyers more appealing to sellers and increasing the chances of accepting your offer.
Suppose you’re excited about purchasing a home. In that case, it’s advisable to be prepared, educate yourself, be fiscally responsible, and speak with our commission-free mortgage experts for guidance in your homeownership journey.
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