When getting a mortgage, it’s recommend that you get pre-approved before you even start looking for your dream home. The pre-approval process will help determine a specific amount that you can borrow at a certain interest rate based on your qualifications and personal credit rating.
Pre-qualification vs. Pre-approval
A mortgage pre-qualification is an informal discussion with your mortgage specialist where general questions will be asked about your income and personal finances and an estimate will be given of how much you can more or less afford as mortgage. No amount is final, no guarantees are made.
A pre-approval is more to your advantage because it provides a specific loan amount at a certain interest rate that is guaranteed for a particular time period such as 30 days or 90 days, depending on the lender. Getting pre-approved means that the lender has actually checked your credit information and verified your documentation and deemed you “qualified” to be granted a mortgage loan.
Benefits of Getting Pre-approved
Getting pre-approval for a mortgage has several benefits to you:
1. A guarantee on a certain interest rate for up to 120 days. In case interest rates go up within the specified time, the agreed rate on your pre-approved mortgage will not be affected. If the rates drop, then you will get the lower rate upon final approval.
2. You know what your buying power is when searching for a home. This will help you set realistic expectations and consider houses that are only within your maximum budget. Also, being aware of a specific price range will put you in a better position to negotiate prices.
3. You have a higher chance of closing the deal on the home you want to buy. Sellers are likely to deal with buyers who are pre-approved because it assures them that you can secure a mortgage and bid on the property.
4. You will be able to calculate how much your mortgage payments and other costs will be. This will allow you to evaluate your budget and see if you can really afford to buy a house now or need additional time to save up some more.
Qualifying for a Mortgage
Your mortgage lender will take into consideration both your income and your debts during the process of pre-approval. They will use these formulas to determine the loan amount they can lend to you.
· Gross Debt Service (GDS) ratio. The percentage of all required monthly housing costs (mortgage payments, property taxes, heat and 50% of condo fees, if applicable) divided by your gross income (income before deductions). Your GDS should be 32% or less to qualify for a mortgage.
· Total Debt Service (TDS) ratio. The percentage of your gross income needed to pay all housing costs (GDS) plus all other debts, such as car payments, credit cards, alimony, and any loans. Industry standards for TDS shouldn’t be higher than 40%.
Documents and Requirements for Getting a Mortgage
Here is a list of documents and information that lenders will use to get you pre-approved for a mortgage:
· Proof of Identification
· Proof of income - If employed, salary and length of employment. If self-employed, minimum 2 year history of self-employed earnings is required. Proof of any additional income such as alimony or bonuses.
· Good credit - Lenders will request a credit report from any one of the two credit reporting agencies in Canada, Equifax or Trans Union to check your credit score. A credit score above 680 usually guarantees better interest rates and terms.
· Proof of assets to prove that you have funds for the down payment and closing costs, as well as cash reserves. This can be:
o Bank statements
o Investment account statements
o Vehicles owned
o Other property owned
· Information on your liabilities: credit card balances, lines of credit, car loans, student loans
· Name, address, telephone number of your solicitor/notary
It’s always a good idea to work with a broker when getting a mortgage. Mortgage Specialist Toronto have access to many different lenders and can negotiate the best rates on your behalf. They also have the industry knowledge to direct you to the right mortgage products on the market, and then support you through the application and settlement process.
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