One of the most important parts of the home buying process is the mortgage pre-approval phase. Lenders like to pre-approve mortgage borrowers before they consider finalizing a loan, and there are also many reasons why you want to be pre-approved for a mortgage. We have put together this guide to help you understand the pre-approval process and be better prepared when you begin the process of buying a home. Read on to find out what you can expect when you click on one of the rates elsewhere on our site to apply for your loan.
Buying a home is a lengthy process that requires the agreement of several parties, an understanding of the mortgage amount you can afford and more. To help make the whole process smoother and shorter, mortgage experts in Canada recommend that you get pre-approved for your mortgage before you start looking for a new home. Mortgage pre-approval is an offer from a lender to issue you a certain mortgage total at a specific interest rate. Basically, the lender looks at your finances and credit history, decides how much of a mortgage you can afford, decides the interest rate for which you qualify and offers to issue you a mortgage if other conditions are met within a certain time frame. These additional conditions include such things as a contract to purchase the home, a home inspection report and more.
Getting pre-approved for a mortgage is not the same thing as final mortgage approval. In fact, it is possible to secure mortgage pre-approval from your lender but then later be turned down for a loan. However, this is exceptionally rare, and most people who get pre-approved will also secure final mortgage approval. Generally speaking, only a drastic drop in income or assets after you have been pre-approved will lead to you not finally securing the loan for which you have been pre-approved.
When you are pre-approved, you lock in a certain interest rate for a certain time period, often as long as 120 days. That means that as long as you qualify for final loan approval, you are guaranteed to get that locked-in interest rate or one that is lower if you sign your contract before the date the rate expires. Your pre-approval will also indicate some of the mortgage rate, term and amortization options to give you an idea of how much you will pay in interest over time and the potential size of your mortgage payment.
There are many reasons why you should seek to get pre-approved for a mortgage in Canada. Here are a few of the more significant ones:
• Pre-approval for a mortgage lets you know exactly how much of a home you can afford. This makes it easier to shop for homes because it helps you to focus only on homes within your price range.
• Pre-approval caps your interest rate. Mortgage pre-approval caps your interest rate and gives you the confidence that you will not be punished by higher rates if they rise during your pre-approval period. Without pre-approval, you must pay whatever rate is current when you finalize your loan, and this rate may be higher than what it was when you began your home search.
• Pre-Approval shortens the buying process. Because you provide most of the documents that lenders require for final mortgage approval when you apply for pre-approval, closing your loan does not take as much time as it would if you were not to get pre-approval or hand over any documents to your lender ahead of time.
• Many real estate agents will not work with you unless you have been pre-approved for a mortgage.
• Pre-approval protects you without obligating you to the lender. When you are pre-approved by a lender, you are not required to get a mortgage through that lender, but the pre-approval protects you from any rate increases for that lender’s mortgage products. In fact, it is often wise to get pre-approval from a couple of different lenders so that you can compare mortgage offers.
• Pre-approval demonstrates that you are serious about buying a home. This makes sellers more willing to consider your offer than offers from buyers who have not been pre-approved.
• You can make an offer right away when you have secured pre-approval. Mortgage seekers who do not yet have loan pre-approval must go to the lender after they find a home they like before they put an offer on it.
Applying for mortgage pre-approval is as simple as contacting different banks or brokers and expressing your interest in pre-approval. You will then apply for the pre-approval and submit the required application support documents. To complete your application, lenders and brokers will ask you for:
• personal identification such as a driver’s license to verify your identity and start a credit history search;
• a list of all your income sources in order to get an idea of how much you are earning each month and calculate your total debt service ratio*;
• a list of all your debts and debt payments so as to calculate your total debt service ratio and gross debt service ratio**;
• proof of assets in the form of bank statements, property deeds and other documents to demonstrate that you have as many assets as you are claiming and can afford your down payment and closing costs;
• a letter from your employer that documents your income and proves to the lender that you earn a sufficient amount to pay your mortgage***; and
• last year’s income tax return to provide further documentation of your income.
* The debt service ratio lets the lender know whether you have enough income to pay all of your debts each month.
**The gross debt service ratio tells the lender whether your housing costs are too high as a percentage of your total required monthly payments.
***Depending on what the letter requests, if you are self-employed, you may prove your income with the last three years of your federal income tax returns or a Notice of Assessment that covers the last two years and two-years’ worth of your business financial statements.
Once you have secured your pre-approval, you will begin looking for a home. Your real estate agent will help you find the residence that best suits your needs and wants, and you will make an offer to purchase to the seller when you find the home for which you have been searching. If the offer to purchase is accepted, final loan approval will begin.
You will gain final approval by contacting your lender or broker, who will verify your finances once more. You may be asked to provide further documentation at this point. Unless you have already obtained these things beforehand, you will probably have to get the property you want to buy appraised. You will also have to buy title insurance and property insurance. Sometimes, the lender will want a land survey conducted as well. If you lack a 20 percent down payment, the lender will calculate how much you need to pay in CMHC mortgage insurance and add it to the loan balance.
As long as your finances check out and there are no problems with the property, you will be presented with several choices regarding loan amortization periods, interest rates, and so forth. After choosing your type of loan, its term, its amortization, and other factors, your loan will be finalized and the bank and attorney will prepare for closing. Your offer to purchase will have included the closing day for the property, which is generally 30 days or more after the agreement to buy the home is signed. On that day, you will meet with your attorney and sign all of the paperwork to close your loan.
Once your loan closing has been scheduled, you can line up movers and other help to get you into your new home. On moving day, you will begin a new adventure in your life as you move into the home you have just purchased.
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