Process of Getting a Mortgage


What are the steps to a mortgage pre-approval?

Mortgage Pre-Approval

Before you start the house-hunting process, there’s an important step you should take to save you time and make the process smoother: getting pre-approved for a mortgage. A pre-approval determines the home price you can afford which allows you to budget for your home purchase and focuses your home search. With a pre-approval you’ll also be able to lock in a mortgage rate in case rates increase during your home search.

What is a Mortgage Pre-Approval?

A mortgage pre-approval is a process that provides you with important information to help you with your home search. 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
  • What your mortgage rate will be for your first mortgage term

Applying for a mortgage pre-approval is free and it doesn’t commit you to one single lender. However, getting pre-approved does guarantee that the mortgage rate you are offered by a lender will not change for 90 to 120 days. By “locking in” your rate, 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 honor the lower rate.

Why Get Pre-approved for a Mortgage

Getting pre-approved for a mortgage helps you in several ways: It saves time in your home search because you’ll only look at homes in your price range. Getting pre-approved is also a signal to your real estate agent that you’re serious about buying, and you’ll receive faster and more targeted service. Finally, when it comes time to make an offer on a home, the fact that you are pre-approved signals to the seller that you should have no problem financing the purchase, which will improve your chances in a competitive offer situation. Don’t forget that if interest rates fall while you are locked in, your lender will honor the lower rate.

How to Get Pre-approved for a Mortgage

To get pre-approved, you must meet with either a mortgage broker or lender. To determine how much you can afford to borrow to purchase a home, they will ask you a series of questions and you will need to provide some supporting documentation.

a. 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, and you might need a larger down payment.

b. 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 5% of the home’s purchase price. If you put down less than 20%, you’ll have to buy mortgage default 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

c. 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.

d. 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, while others don’t require proof until your offer has been accepted and you need to finalize your mortgage application.

What Happened 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. If you lock in that interest rate, 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.

** Make sure you are pre-approved and not just pre-qualified.