Finding your perfect home can be a laborious process, and unfortunately, securing the ideal mortgage to pay for it can make the home buying process significantly more difficult. Even if you have a great job, have saved up enough money for a downpayment, and have an excellent credit score, you could still face some issues when looking to secure your mortgage. But not to worry – with the right preparation and mortgage broker on your side you can avoid common pitfalls many face during the home buying process.
In this blog, we’ll provide all the details you need to be adequately informed when it comes time for you to secure your mortgage. Keep scrolling to learn about:
- How pre-qualification differs from mortgage pre-approvals
- The importance of pre-approvals
- Mortgage approvals vs pre-approvals
- Tips and tricks to prepare for the approval process
- How to get the mortgage approval process started with Pineapple
Getting Started: Pre-qualification and Mortgage Pre-approval
It’s important to note that pre-qualification and a mortgage pre-approval are different.
Pre-qualification is an informal process that doesn’t require financial documents or credit checks. Pre-qualification does not tell you if a mortgage lender will approve your loan. Because of this, realtors will not accept it as proof that you are in a position to buy. However, it is still a helpful tool, especially early in the home buying process, as it can give you an idea of what you can afford, allowing you to search for homes inside your price range.
On the other hand, the mortgage pre-approval process is much more stringent. It involves almost all the steps and information needed for an actual mortgage approval. Using your credit score and financial information, a lender will determine if you qualify for a mortgage with them. The pre-approval will also determine up to what amount you qualify for and at what interest rate ––if pre-approval is granted, you will receive a formal letter outlining these details that can be used as proof to show realtors that you are a qualified buyer.
Pre-Approvals vs. Approvals: What’s The Difference?
Yes, the information required for a pre-approval is similar to an approval, but they are not the same. A pre-approval does not guarantee your loan or mean you are receiving the best rates and terms. It is simply a formal letter outlining what a given lender will lend to you based on your financial situation. More below on why that is so important.
On the other hand, an approval is what is required after you have found your dream home and put in the offer. It is approving the amount of loan needed, the terms, the conditions and the interest rates. Just because you received pre-approval does not mean approval is guaranteed. If material changes have affected your financial health or credit score, your approval could be declined.
Why Pre-approvals are Important?
Mortgage pre-approvals are an essential part of the home buying process. As mentioned above, pre-approvals let you know the mortgage amount that you qualify for. Knowing this will allow you to shop for your dream home effectively as you will know which price range you have to stay within, and if there is a bidding war for a home, you will know what your maximum qualification is before you push your boundaries.
Another reason pre-approvals are so valuable is that many realtors won’t show you a home without a formal pre-approval letter. Realtors don’t want to spend time showing homes to people who can’t afford them, so obtaining a pre-approval will help ensure you can see the homes you are interested in.
Finally, if you receive a pre-approval, you will be qualified for a mortgage rate lock. When interest rates are rising, being able to lock in your rates while they are low is very important.
Tips to Prepare for the Approval Process
Now that we’ve determined the importance of getting pre-approved let’s look at how you can best prepare yourself to get approved for the mortgage amount you want at the best possible rate.
Improve Your Credit Score
Your credit score is one of the significant factors lenders use to determine if you are approved/pre-approved for a mortgage. Lenders use it to determine your trustworthiness when it comes to paying back your debts.
In Canada, credit scores range from 300 (poor) to 900 (excellent). To have the best shot at being approved for a mortgage, you will want a credit score of at least 680 to qualify for the best rates. That said, products are available for those with lower credit scores and damaged credit, just not at the lowest rates on the market. The rule of thumb is that the higher your credit score, the better, as it will help guarantee approval and give you access to the lowest rates available.
Here are a few things that you can do to help improve your credit score:
- Pay your bills on time
- Pay off your debt
- Don’t take out credit that is not necessary
- Keep your credit utilization under 30%
- Don’t close accounts even if you’re not using them
Save for a Downpayment
First and foremost, to qualify for a mortgage in Canada, you must have the minimum amount necessary for a down payment. The down payment that is required varies depending on the price of the home.
Less than $500,000: The down payment required is 5% of the home’s purchase price.
$500,000 – $999,999: A 5% down payment is required for the first $500,000, then 10% is needed for the remaining amount up to $999,999.
$1,000,000 and over: These homes require a 20% downpayment
When your down payment is less than 20% of your home’s purchase price, you will have to pay mortgage insurance. You can eliminate this cost of home ownership by ensuring that you save up enough to put 20% down.
By saving up more than just the required amount, you will be able to limit the size of the mortgage required, making your chance of getting approved even greater!
Pay Off Your Existing Debt
To qualify for a mortgage in Canada, you must pass the federally mandated mortgage stress test, which requires you to prove you can afford to pay for a mortgage at a price higher than the contract rate you will receive at approval. A key part of this test is the Total Debt Service Ratio (TDS). The TDS ratio is the amount of your pre-tax income to pay off debts. Mortgage applicants should have a TDS ratio of less than 44% to qualify for rates with prime lenders.
You can lower your TDS ratio by increasing your income (easier said than done) or by working toward paying off your debts, such as:
- Credit card bills
- Car loans
- Student loans
- Lines of credit
Have a Steady Source of Income
As mentioned above, having a robust and steady source of income is a big part of passing the mortgage stress test. Stress test aside, when determining someone’s approval status, one of the important factors that lenders look at is your income and its stability. Having a full-time job is the best way to prove this, and in some cases, lenders will look at you more favourably if you are with the same company over a long period of time.
So what does that mean for you if you’re self-employed? Well, it can make things a bit trickier. You will likely need to show your business income over a 2-year history to prove stability. Working with a mortgage broker is the best way to ensure you are putting yourself in the best position to get approved.
Get Your Information Ready
Now that we’ve covered how you can prepare yourself to have a better chance at mortgage approval, let’s look at how you can prepare for the actual pre-approval meeting with your mortgage broker.
To help ensure everything goes smoothly during your pre-approval meeting, you should have the following information:
- Address Information: your address information for the past 3 years
- Employment information for the last 3 years
- Sources of verifiable income (employment letter, bank statement, pay stub, etc..)
- A Notice of Assessment from your income tax return if you are self-employed
- The value of any automobiles, properties, savings, and investments you own
- Your most recent statements for mortgages, loans, and lines of credits
- You’re most recent credit card statements
- The estimated value of the home you are looking to purchase
- Your estimated housing expenses (property tax, condo fees, heating costs, etc..)
- You can also bring your SIN for added information
If the mortgage you are applying for has a co-borrower, you must also provide their financial information.
Getting the Approval Process Started with Pineapple
At Pineapple, we take pride in making the mortgage approval process as easy as possible. Below is our 6-step mortgage approval process:
- Fill out our simple online pre-qualification on a Pineapple broker’s website. It will only take you ten minutes!
- You will receive an estimated mortgage amount right away. One of our agents will then contact you to go over your information and put together your pre-approval.
- We will complete your pre-approval with one of our lenders. You will get a mortgage amount and a locked-in rate based on the information provided.
- Once you put an offer in to buy your home and go under contract with an APS agreement, your agent will collect additional documentation and apply for your actual approval from an appropriate lender (This could be a different lender than the one you were pre-approved with).
- The mortgage broker will send a commitment letter from the lender and an approval package for you to sign. We use seamless e-signature software to make the process easier for you!
- Once signed and approved, you will be required to satisfy the conditions in the approval package (commitment letter) before the dates mentioned (usually ten days before closing).
Getting approval for your mortgage can be stressful, but it doesn’t have to be. At Pineapple, our expert team of mortgage brokers will guide you through the approval process to make securing your mortgage simple. With our extensive network of Canada’s leading lenders to work with, we will help you get approved for a mortgage with the right terms and the right rate.
Get in touch today to get the approval process started!