Mortgage Pre-Approval: How to Get It and When to Start Trying


What is a Mortgage Pre-approval?

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. That step is getting a mortgage pre-approval. When you get pre-approved for a mortgage, you’ll find out the maximum amount you can afford to spend on a home. It’ll also tell you the monthly mortgage payment associated with that limit. Finally, pre-approval tells you 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. So, that means you’re protected if interest rates rise while you’re shopping for a home. If interest rates decrease during this time, your lender will honour the lower rate. A pre-approval isn’t a complete guarantee that you’ll receive that rate. The guarantee relies on your finances staying constant when you finally apply for your mortgage.

Here are four factors that play a main role in determining how large a mortgage you might be pre-approved for:

1. Credit Score

Your credit score is an indicator of your financial health. It shows lenders how risky it may be to lend you money. If your credit score is between 680 and 900 (approximately), you’ll qualify for a mortgage with an “A” level lender like a major bank. Credit score falls below 680 and above 600? Lenders will look at the other details of your individual 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, to get a mortgage pre-approval. Lastly, if your credit score lies below 600, you will only qualify for a mortgage with a “B” level lender. That means you won’t get the current best mortgage rates in the market.

2. Down Payment

Your down payment is the cumulative 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. Some of this is dependant on the price of the home, or your buying status. If you put down less than 20%, you’ll have to buy mortgage default insurance (also called CMHC insurance). This is to protect your lender in case you default on your loan.

3. Debt Service Ratios

Your debt service ratios are two calculations that lenders do to determine the largest monthly mortgage payment you will be able to afford. They base this on your current monthly income, expenses and overall debt. Lenders use these ratios to make sure that you can afford to make your monthly mortgage payments. They do this to ensure that there is a smaller risk that you will have to 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 differ. 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.

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