Mortgage Approval Process

Mortgage Approval Process

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    Published 21/10/2020 11:10 EST
    Updated 17/11/2020 14:11 EST

    So you’ve decided to buy a home! You created a budget, found a realtor, went house hunting, found the perfect place, had your offer accepted, finalized the Offer to Purchase and are ready to close the deal. All that remains in your homeownership journey now is the all-important mortgage approval. 

    Stepping back a bit, even before you start your home search, it’s highly recommended that you get pre-approved for a mortgage. See: What’s the Difference Between Pre-Approval vs Pre-Qualification?

    Key Takeaways
    • Getting pre-approved for a mortgage provides better leverage with sellers and ultimately makes your offer more appealing, especially in a competitive market
    • Being prepared with all your documents on hand – including employment, down payment, finances and property details – will help streamline your approval process
    • If you’re turned down for a mortgage, ask for clarification. From there, you can work on addressing the issue(s) and hopefully continue on your home ownership journey

    In today’s competitive housing market, complete with multiple offers and fast-paced decision-making, you’ll want to ensure that you’re a strong contender, and being pre-approved will definitely help. Having the confidence that comes from knowing your financing is in place provides better leverage with sellers and ultimately makes your offer more appealing. In addition, knowing the amount you can borrow and the price you can afford enables you to concentrate your search on homes in your price range. A pre-approval also facilitates the final approval process as it represents a conditional commitment by your lender to grant you the mortgage you need. 

    Once you make an offer to purchase your home, you’ll complete a final mortgage application, which includes your personal and financial information, and the details of the loan agreement including the amount, term, amortization and interest, in addition to a description of the property you’re buying. 

    The application then goes through a process known as underwriting, during which a mortgage underwriter thoroughly reviews the application and accompanying documentation in order to assess the level of risk associated with the loan, and ensure the application satisfies all lending rules and requirements. If there are no concerns, the mortgage will receive approval. If, however, the underwriter detects any issues, expect to receive a conditional approval, so long as those issues are rectified. On the other hand, if the issues are more significant and set off red flag warnings, the application could be rejected outright. 

    Mortgage process documents required 

    As with many stages of the home buying process, you’re required to submit a number of important documents for the final mortgage approval. Here’s a sample of what you’ll need to provide: 

    Employment information

    In order to verify your employment and income, you’ll be required to provide any, or a combination, of the following:

    • T4 slip
    • Most recent paystub
    • Evidence of an electronic pay deposit 
    • Signed letter from your employer
    • Proof of other sources of income such as freelance work, rental income or investments (eg, dividends or capital gains) 

    If you’re new to your position or employer, you may also be required to submit similar information from your previous place of employment.

    👆 Tip

    Where possible, hold off switching jobs until after your mortgage has closed. This will help your mortgage experience run a lot smoother

    Proof of down payment 

    Your mortgage approval application also compels you to provide proof that you have the required down payment, which could come from one place or a combination of sources: 

    • Your own savings – you’ll need to provide your most recent bank or investment statement
    • RRSP – if you’re a first-time home buyer, you may be taking advantage of the Home Buyers’ Plan and will be required to provide an RRSP withdrawal statement (See: Use the Home Buyers’ Plan to Buy Your Home Sooner)
    • Gift – if someone you know (typically a family member) is gifting you the money, that individual will be required to provide a signed letter outlining the amount of the gift, clearly stating that it’s not a loan and, therefore, doesn’t need to be repaid
    • Proceeds from the sale of another property – a copy of the Sale Agreement will be required

    Finances

    In addition to providing proof of your down payment source, you’ll be required to produce a number of other pertinent items related to your finances, which include: 

    • Amount of your deposit that was used to secure the purchase 
    • Complete list of all of your assets and liabilities
    • Current bank statement
    • Most recent tax return
    • Void cheque or bank account number for your mortgage withdrawal payments

    Property details

    The application also includes a number of key details and documents related to the home you’re buying. These include: 

    • Complete address of the property
    • Amount of property taxes and condo fees (if applicable)
    • Anticipated heating costs
    • Original real estate listing
    • Reports from home appraisal, home inspection and land survey (if conducted)
    • Offer to Purchase agreement with final purchase price and closing date
    • Contact information for your lawyer

    What happens if my application is rejected? 

    The mortgage approval process is rigorous, and for good reason. Lenders need to evaluate whether they have confidence in your ability to take on a mortgage and comfortably make your payments. 

    If you went through the pre-approval stage, the likelihood of receiving final approval from your lender is quite good. If, however, you decided to forgo the pre-approval stage, or if there are other circumstances that prevented your mortgage from being approved, you’ll want to ask your lender what happened. From there, you can work on addressing the issue(s) and hopefully continue on your home ownership journey. 

    👆 Tip

    Ask about other types of lenders if you’re turned down for a mortgage. Alternative or private lenders have different lending criteria from more traditional lenders, including easier qualification requirements

    Some of the most common reasons that get in the way of an outright mortgage approval revolve around eligibility and risk level. Here are some tips to consider that can help get you back on track:

    • Improve your credit rating – this has a significant impact on determining whether you’ll  qualify (See: Do You Understand Your Credit Score?)
    • Increase your down payment – the larger the down payment, the less you have to borrow, which reduces your risk in the eyes of your lender (See: How Much do You need for a Down Payment in Canada?)
    • Pay down debt – if your debt-to-income ratio is too high, lenders will wonder whether you’ll be able to afford your mortgage in addition to all of your other debt payments (eg, credit cards, car payments, other loans) (See: What’s an Ideal Debt-to-Income Ratio for a Mortgage?)
    • Create a budget to help spread your money further, decrease your living costs, look at ways to increase your income and make all payments on time and in full

    Buying a home can be as stressful as it is exciting, but being prepared, educating yourself, being fiscally responsible and talking to a nesto professional will help ensure that, in the end, your positive emotions ultimately outweigh the negative.

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