Mortgages in Canada: How Does the Mortgage Approval Process Work?

The mortgage approval process can be very straightforward if you know what to expect. In this post, we’ll go through what a mortgage approval is and what you can do to prepare. Once this process is complete, you’ll be that much closer to finding the home of your dreams!

What’s the difference between a mortgage approval and a pre-approval? 

A mortgage pre-approval is when a lender assesses your finances and evaluates what you can afford for a down payment. They then pre-approve you for that amount depending on the evaluation. Your official mortgage approval would be based on those rates. 

What is the difference between pre-approval and pre-qualification? 

A pre-approval means you have been approved for a certain mortgage amount after a lender has gone through your finances, credit score, and a few other things. A pre-qualification, on the other hand, is more of a conversation with a lender to see if you’re eligible for a mortgage and how much you might be able to qualify for. A pre-approval gives you an exact amount a locked-in interest rate. 

When is the right time to get a pre-approval?

Keep an eye on Edmonton’s interest rates and shop around for the best lender. This will help you determine the optimal time to get a pre-approval and with which institution. While this will take some research, you’ll congratulate your efforts when you lock in that super low-interest rate. 

What do you need to get your mortgage pre-approved? 

• At least two years of personal tax returns and financial statements
• Photo ID 
• Record of employment income 
• A letter from your employer stating your current salary
• Account numbers as well as the location of your bank accounts and investments
• Proof of assets

How much will you be approved for? 

This amount is dependent on a couple of factors including your credit score, income, and gross debt ratio. This number can also be figured out beforehand by using a mortgage rate affordability calculator – although this does not guarantee what you’ll be approved for. The lender you choose will do a more in-depth analysis of your finances to give you a more accurate estimate. 

Finalizing Your Mortgage Approval 

In order to finalize your pre-approval, you’re going to want to keep your finances at a stable level. The lender will also want to make sure they’re giving you the correct amount for your mortgage loan. This means they’ll make any changes if need be, and then they’ll finalize your approval. 

A Few More Things…

Here a few more things to consider to help you decide if a pre-approval is right for you: 

• Renewal of pre-approval is a simple process that doesn’t take very long, so don’t worry if you don’t find your dream home within an estimated amount of time. 
• The processing time is quicker because you’ve already filled out the paperwork.
• There is no guarantee the loan amount you are pre-approved for won’t need to be re-evaluated.
• You have to get an appraisal of your new home – but they aren’t done at the pre-approval stage. For this reason, make sure you do your appraisal before you make an offer. This will prevent you from overpaying and risking the lender nullifying the pre-approval. 

Now that you know more about the mortgage pre-approval process, you’ll be able to seek out great lenders with confidence. Remember to do your research, and you’ll find yourself in a great home (with a great interest rate) in no time!

5 Reasons Why You Need a Pre-Approval

Getting a mortgage pre-approval is a good first step when you’re starting to get serious about buying a home. It lets you know whether you’ll qualify for a mortgage and how much the bank is willing to lend you. Applying for pre-approval isn’t a commitment to work with a bank, so there aren’t any downsides to applying. There are, however, plenty of good reasons to get one. Once you learn more, you’ll want to gather up your paperwork and head to the nearest bank.

1. Setting Realistic Expectations    

Many people overestimate how much they can afford. They assume their credit is good enough to qualify for the low advertised mortgage rates. They use their annual salary rather than their monthly salary to calculate costs. They use a mortgage calculator that doesn’t factor property taxes and mortgage insurance into the monthly payment. Those who do this are often shocked when they apply for a mortgage. They may only qualify for amounts that are tens or hundreds of thousands less than they thought.

When you get a pre-approval, the bank will tell you what your interest rate will be and how much they’ll allow you to take on as a monthly payment. Using these figures, you can shop for a home you can afford.

2. Ironing Out the Kinks

Most Albertans have a straightforward financial situation. They work full-time jobs and earn an annual salary. Those who don’t fit this mould can have a harder time getting a mortgage. If you have a seasonal income that varies greatly from month to month or if you freelance, the bank will want to know you can handle the down periods, so they may look for a longer financial history. If you work overtime or were counting regular bonus payments as part of your annual salary, you may be surprised to find the bank won’t count that income when it makes its calculations. After finding out you have a unique situation, you may need to make some adjustments to make your mortgage more affordable.

3. Fixing Any Problems

Getting pre-approved early also gives you an opportunity to fix any mistakes you might have. For instance, if your credit score is low, you may be able to work hard to bump it up to the next tier before you need your mortgage. If a high debt ratio is lowering the monthly payment the bank says you can afford, you can pay that debt down to get a better deal. You don’t always know these details until you apply for a mortgage.

4. Locking in Current Rates

The federal government plans to increase mortgage rates throughout 2018. Waiting to apply for a mortgage may mean you’re stuck with higher rates. When you apply for pre-approval, it locks in the current mortgage rates for a certain timeframe. If rates go up, you’ll still qualify for the rates you locked in. Fortunately, there’s no risk involved here. If rates go down, you’ll be able to get the lower rates. You’re not locked into high rates.

5. Saving Time    

Once you find your dream home, you want to get the process started as quickly as possible. Applying and getting approved for a mortgage takes time. If you’re missing some paperwork, the process takes even longer. With a pre-approval, you get this tedious task out of the way. You already qualify for the mortgage, and your bank already has most of the paperwork. You’ll likely have to submit some current pay stubs, but you won’t have to fill out new forms or track down the necessary financial data. You also won’t have to worry about the financing falling through and having to start over from scratch.

Banks may have different requirements for buyers who want to purchase new construction, so it’s smart to get your pre-approval from one of the builder’s approved lenders. In fact, a good builder will often facilitate a pre-approval for you right in their showhomes. This means they can use their buying power to save you money in the long term, get you a better interest rate and ensure a quicker, smoother process overall. 

In short, if you’ve been thinking of purchasing a new home, a mortgage pre-approval is an important first step. Not only will it save you time and, in some cases, money, a pre-approval with Sterling Homes will ensure an easier, low-stress home buying process.

What Should I Bring to a Mortgage Pre-Approval Meeting?

Before you start shopping for homes in earnest, you should get a mortgage pre-approval from the bank. This is more than just a quick assessment of your financial situation based on your stated income. The bank actually verifies your financial information before they make their decision.

If you want your meeting to go smoothly, you should make sure that you bring everything that you’ll need with you. The following is a brief list of the things that you’re likely to need for a successful mortgage pre-approval.

The Application Form

You’ll need to fill out an application to get pre-approved for a mortgage. In most cases, you can do this online ahead of time, or you may be able to get a paper form to fill out. No matter how you get it, by filling out the application before you meet with a lender, you’ll save a lot of time. The application will likely also have a list of other things that the bank may require as part of your application. While our list is fairly complete, requirements can vary from lender to lender.

Identification

The bank will need to know who you are, so be sure to bring some form of identification. A driver’s license or a passport should do the trick, though other forms of identification may be acceptable. The bank may need to make a copy of the identification or they may just visually confirm that you are who you say you are.

Past Tax Forms and/or Pay Stubs

You can’t simply tell the bank how much money you earn and expect them to loan you money. They need to see proof that you’ll be able to make your monthly payments by verifying that you’re gainfully employed. Most people can do this with a few recent pay stubs. Another way to show that you earn income is through past tax forms.

Those who earn a steady income and have had the same job for several years tend to have an easy time getting approved for a mortgage. If you freelance, own your own business or have recently changed positions, the lender may require additional proof of income. Here are some mortgage tips for self-employed people.

One thing to note is that bonuses and overtime pay can count when the lender makes a decision about how much money to lend. Lenders will typically request up to two years worth of bonus and overtime history to maximize your loan amount.

Proof of Assets

Qualifying for a mortgage isn’t only about being able to make the monthly payment. You also need to be able to make a down payment and pay for the closing costs. The bank wants to see evidence that you’ll be able to do this. Basically, you’ll need a bank statement showing that you have this money saved up. If you’ll be borrowing money from your RRSP, you’ll need to show proof that you’re able to do that.

In most cases, the assets that you have should be liquid assets, like cash savings. Assets that you’d have to sell, like a boat or jewellery, won’t count. Sell these things first to show that you have cash.

List of Debt Commitments

Your debts will also factor into the equation when the lender determines how much money they’ll loan you, so they need to see what your financial commitments look like in order to make those calculations. It would be best to consult a professional to analyze your debt commitments.

Note that the lender will use 3 percent of the balance of your credit balance reported to Equifax instead of your minimum credit card payments in their calculation. Need tips on how to actively pay down your debt? Click here.

If you’re going to buy a new home, you need to get a mortgage pre-approval. While it’s sometimes possible to take care of everything online, going to a meeting gives you a chance to ask any questions you may have. It pays to gather everything you need beforehand to avoid any holdups.

Related resource: Down Payments: Explained