The pre-approval process

Wednesday Nov 14th, 2018

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A pre-approval is when a potential mortgage lender looks at your finances to find out the maximum amount they will lend you and what interest rate they will charge you.

With a pre-approval, you can:

- know the maximum amount of a mortgage you could qualify for-

- estimate your mortgage payments

- lock in an interest rate for 60 to 120 days, depending on the lender

The pre-approval amount is the maximum you may get. It does not guarantee that you'll get a mortgage loan for that amount. The approved mortgage amount will depend on the value of your home and the amount of your down payment. It may be a good idea to also look at properties in a lower price range so that you don’t stretch your budget to its limit.

Remember that you’ll also need money for:

- closing costs

- moving costs

- ongoing maintenance costs

Check your credit report

Before you start shopping around for a mortgage, order a copy of your credit report. Make sure it does not contain any errors. A potential lender will look at your credit report before approving you for a mortgage.

If you don’t have a good credit score, the mortgage lender may:

- refuse to approve your mortgage

- decide to approve it for a lower amount or at a higher interest rate

- only consider your application if you have a large down payment

- require that someone co-sign with you on the mortgage

 

Learn how to order your credit report.

Find out how to check your credit report for errors.

What to provide to your lender to get pre-approved

Before pre-approving you, a lender will look at your current assets (what you own), your income and your current level of debt.

You’ll need to provide your lender or mortgage broker with the following:

- identification

- proof of employment

- proof you can pay for the down payment and closing costs

- information about your other assets, such as a car, cottage or boat

- information about your debts or financial obligations

For proof of employment, your lender or mortgage broker may ask you to provide:

- proof of current salary or hourly pay rate (for example, a current pay stub and a letter from your employer)

- your position and length of time with the organization

- Notices of Assessment from the Canada Revenue Agency for the past two years, if you're self-employed

For proof you can pay the down payment, your lender or mortgage broker may ask you to provide recent financial statements from bank accounts or investments.

Your debts or financial obligations may include:

- credit card balances and limits, including those on store credit cards

- child or spousal support amounts

- car loans or leases

- lines of credit

- student loans

- other loans

Questions to ask your lender or broker when getting pre-approved

When getting pre-approved, ask your broker or lender the following:

- how long they guarantee the pre-approved rate

- will you automatically get the lowest rate if interest rates go down while you're pre-approved

- if the pre-approval can be extended

Qualify for a mortgage

To qualify for a mortgage, you’ll have to prove to your lender that you can afford the amount you're asking for.

Mortgage lenders or brokers will use your financial information to calculate your total monthly housing costs and total debt load to determine what you can afford.

Lenders will consider information such as:

- your income (before taxes)

- your expenses (including utilities and living costs)

- the amount you’re borrowing

- your debts

- your credit report and score

- the amortization period

Total monthly housing costs

Your total monthly housing costs shouldn’t be more than 32% of your gross household income. This percentage is also known as the gross debt service (GDS) ratio.

These housing-related costs include:

- mortgage payments

- property taxes

- heating

- 50% of condo fees (if applicable)

Total debt load

Your total debt load shouldn’t be more than 40% of your gross income. This includes your total monthly housing costs plus all of your other debts. This percentage is also known as the total debt service ratio.

Other debts may include the following:

- credit card payments

- car payments

- lines of credit

- student loans

- child or spousal support payments

- any other debts

Qualifying interest rates for mortgages

To qualify for a mortgage loan at a bank, you will need to pass a “stress test”. You will need to prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your mortgage contract.

Credit unions and other lenders that are not federally regulated may choose to use this mortgage stress test. They are not required to do so.

The qualifying interest rate your bank will use for the stress test depends on whether or not you need to get mortgage loan insurance.

If you need mortgage loan insurance, the bank must use the higher interest rate of either:

 - the Bank of Canada’s conventional five-year mortgage rate

- the interest rate you negotiate with your lender

If you don’t need mortgage loan insurance, the bank must use the higher interest rate of either:

- the Bank of Canada’s conventional five-year mortgage rate

- the interest rate you negotiate with your lender plus 2%

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