MORTGAGE PROCESS
Before you start the house-hunting process, there’s an important step you can take that will both save you time and make the process easier: getting pre-approved for a mortgage. A pre-approval helps you understand the home price you can afford, allowing you to budget for your home purchase and focus your home search. With a pre-approval you’ll also be able to secure a great mortgage rate offer ahead of time, and protect yourself from rate increase during your home search.
What is a Mortgage Pre-approval?
A pre-approval is an in-principal commitment from a mortgage provider to lend you a certain size mortgage at a particular rate. When you get pre-approved for a mortgage, you’ll find out the maximum amount you can afford to spend on a home, the monthly mortgage payment associated with your maximum purchase price, and what your mortgage rate will be for your first mortgage term.
Applying for a mortgage pre-approval is free, and doesn’t commit you to a lender. However, getting pre-approved does hold the mortgage rate you are offered for 120 to 160 days. This means you're protected if interest rates rise while you’re shopping for a home. If interest rates go down during this time, your lender will honour the lower rate. That said, a pre-approval isn't a full guarantee you'll receive that rate. That relies on your finances staying the same when you finally apply for your mortgage.
Factors in your mortgage pre-approval
The following four factors play a role in determining how large a mortgage, and at what rate, you'll be pre-approved for.
1. Credit Score
Your credit score is a measure of your financial health, and shows lenders how risky it may be to lend you money. If your credit score is between 680 and 900, you’ll qualify for a mortgage with an “A” level lender, such as a major bank.
If your credit score is below 680 and above 600, lenders will look at the other details of your finances to determine if you can qualify with an “A” level lender or not. If you don’t qualify, you’ll need to go through a “B” level lender, such as Home Trust, to get a mortgage pre-approval.
If your credit score is below 600, you will only qualify for a mortgage with a “B” level lender, and you won’t get today’s best mortgage rates.
2. Down Payment
Your down payment is the lump sum of money you’ll put towards the purchase of your home. In Canada, the minimum down payment you must make is between 5% and 20% of the home’s purchase price (depending on the price). If you put down less than 20%, you’ll have to buy mortgage default insurance (also called CMHC insurance) to protect your lender in case you default on your loan.
The size of your down payment affects how much you can borrow. For example, if you wanted to buy a house worth $300,000, you would need at least a $15,000 down payment.
$300,000 x 5% = $15,000
Minimum down payments in Canada:
The minimum down payment in Canda is 5% for homes costing less than $500,000. For homes priced between $500,000 and $1 million, you need to put down 5% of the first $500,000, then 10% of any amount over $500,000. For example, a house worth $600,000 would require a down payment of at least $35,000.
($500,000 x 5% = $25,000) + ($100,000 x 10% = $10,000) = $35,000
For houses priced over $1 million, a 20% down payment is required.
3. Debt Service Ratios
Your debt service ratios are two calculations that lenders use to determine the largest monthly mortgage payment you can afford, based on your current monthly income, expenses and debt.
Lenders use these ratios to make sure you can afford to make your monthly mortgage payments, even with all of your other financial commitments, so there’s a smaller risk that you could default on your mortgage payments.
4. Supporting Documentation
Depending on the mortgage broker or lender you sit down with, the documentation you’ll need to submit for your pre-approval may vary. For example, some mortgage brokers require proof of income for a pre-approval. Others won’t require proof until your offer has been accepted and you need to finalize your mortgage application.
Here is a list of documentation you may need to provide for your mortgage pre-approval:
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Identification (eg Canadian driver license or a passport)
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Proof of income (pay stubs and letter from your employer, or a notice of assessment if you are self employed)
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Length of time with employer
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Proof of down payment and ability to pay closing costs (recent financial statements of bank accounts and investments)
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Proof of any other assets like a car, cottage or boat
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Information about other debts including:
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Credit cards or lines of credit
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Spousal or child support payments
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Student loans
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Car leases or loans
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Personal loans
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After You Receive a Mortgage Pre-approval
Once you’ve been pre-approved, you’ll know the maximum amount you can afford to borrow, as well as the mortgage rate lenders are willing to offer you. With your pre-approval, you’ll be protected from future interest rate increases for the next 120 to 160 days while you search for a home. You can then take the maximum mortgage amount and use it as a guide during your house-hunt, so you only view homes you know you can afford to buy.