When thinking about buying a home, you probably feel a combination of excitement and a bit of overwhelm. There’s a lot to know. The real estate market is constantly changing, and it’s a massive financial investment so the stakes are high. For most Canadians, the path to buying a home starts with financing. So let’s discuss one of the most important steps you’ll take when buying a home.
What is a mortgage pre-approval?
A mortgage pre-approval is a process where a lender evaluates your financial situation and creditworthiness to determine how much of a home loan they are willing to approve you for. If you plan on getting a mortgage, a pre-approval is essential before you start house hunting because it gives you a clear idea of your budget and shows sellers that you’re a serious buyer.
It’s also an excellent way to lock in an interest rate for a certain period, giving you peace of mind that you’ll have that rate even if interest rates go up. Overall, getting pre-approved for a mortgage can save you time and make the home-buying process a lot smoother!
When applying for mortgage pre-approval, I look at several key factors to determine your eligibility and prepare your application for the lender. These include:
- Assets: Lenders want to know what you own, such as cash, property, investments, and other assets, as it will help them determine your net worth and how much you can afford to put down as a down payment.
- Income: Lenders will want proof of your current salary or hourly pay rate and your position and length of time with the employer. Self-employed individuals may need to provide proof of the last two years of income.
- Debt: Lenders will also want to know about your debts or financial obligations, including credit card balances, car loans, student loans, child or spousal support, and other debts.
To apply for pre-approval, you’ll need to provide the following documents:
- Identification: Two pieces of government-issued ID, such as a passport or driver’s license.
- Proof of employment: This may include a Letter of Employment, recent pay stub, T4 slip(s) and Notice of Assessments from the CRA. Self-employed individuals need to prove a stable income for the last two years.
- Proof of down payment and closing costs: Lenders may ask you to provide recent statements from bank accounts or investments to determine if you have the necessary funds for a down payment and closing costs.
- Other Documents: Such as a void cheque, proof of fire insurance, mortgage statements and property tax statements for currently owned properties,
Benefits of getting pre-approved
- Helps establish a budget and price range for house hunting: Pre-approval enables you to understand how much you can afford to spend on a home and narrow the search to properties within your budget.
- Increased credibility with sellers and real estate agents: A pre-approval letter demonstrates to sellers and real estate agents that you are serious and financially prepared to purchase a home, which can give you an edge in a competitive housing market.
- Opportunity to lock in a mortgage rate: Pre-approval allows you, as the buyer, to lock in a mortgage rate, which can be especially beneficial if interest rates are rising.
- Avoid delays and disappointment: The pre-approval process helps you identify potential issues with your credit or income that might delay or prevent you from getting approved for a mortgage.
- Save time and money: By getting pre-approved before house hunting, you can save time and money by only looking at properties you can afford and avoiding the stress and disappointment of falling in love with a property you can’t afford.
- Helps to make an offer with more confidence: Knowing that you’re pre-approved, you can make an offer on a property with more confidence, knowing that you have a good chance of getting approved for a mortgage.
- Prepare for the unexpected: The pre-approval process helps the you know your mortgage rate and borrowing power so you can plan accordingly and avoid surprises.
How it Works
Step 1: Schedule a Discovery Call
Let’s schedule a call for about 30 minutes to discuss your goals and any concerns you may have. I’ll ask a few questions to make sure we cover all the bases. By the end of the call, you’ll understand how pre-approval can help you and the next steps. I’ll send you a checklist of documents you’ll need to provide and explain the process. No pressure, though – the decision to move forward is entirely up to you.
Step 2: Get Pre-Qualified
Once you’ve sent me your documents, my team will review your financials and run some calculations to determine how much you can afford. If there are any issues, this is when we’ll address them and come up with solutions. We’ll also discuss different lender options and features, but you can wait to decide. Lenders always come out with new promotions and offers, so it’s best to wait until you’ve found a property.
Step 3: Find a Home and Make an Offer
Armed with a pre-approval, you’re ready for the fun part – finding your dream home! Your Realtor can take you to view properties. Once you’ve found the perfect place, I’ll work closely with your Realtor to ensure the approval process goes smoothly.
Frequently Asked Questions
Do pre-approvals affect credit score?
A little bit. We’re talking about approximately 3 points out of 900. But it’s important to uncover anything on your credit bureau that should be addressed early. For example, I’ve had clients who always pay their bills on time have a collection from telecom companies because of a clerical error. Small things like that can cause big problems if we don’t know about them early on in the process.
What is needed for a pre-approval?
We’ll ask for a list of documents. Including (but not limited to):
1) Letter of employment
2) Proof of down payment
3) Tax documents showing income
4) Recent pay stubs
Can I shop for a home without getting pre-approved?
Technically yes, but it’s not a great idea. You might make an offer on a home you can’t afford. Or you might have problems in your finances that surprise you later and end up costing a lot of money.
Does a pre-approval guarantee a rate?
No, that’s called a rate hold. Rate holds are available from a select few lenders, but the’re typically quoted at a higher interest rate than what’s available on a ‘live offer’, so it’s not always worthwhile to secure a rate before you find a home. It depends on what’s happening in the mortgage market, so we’ll discuss this on your discovery call.
Does a pre-approval guarantee financing?
No, funding is never guaranteed. Approval always comes from the lender. I provide a review of your finances to identify potential problems so they can be addressed early.