What is a Mortgage Pre-Approval and why do I need one?

How Do I Get Pre-Approved for a Mortgage?

If you’re planning to buy a home, one of the first steps in your home-buying journey should be getting pre-approved for a mortgage. A pre-approval can give you a clearer picture of how much home you can afford and demonstrate to sellers that you're a serious buyer. So, what does the mortgage pre-approval process entail, and how can you get started?

What is Mortgage Pre-Approval?

A mortgage pre-approval is an official document from a lender indicating how much they are willing to lend to you for your home purchase, based on your financial situation. The pre-approval process involves evaluating your income, credit history, debt levels, and other factors. Once you’re pre-approved, you'll know the amount you can borrow and the interest rate you may qualify for.

Why is a Pre-Approval important?

• Strengthens your position as a buyer: In competitive markets like the Greater Toronto Area, sellers often prioritize offers from pre-approved buyers because it shows you're financially capable of securing a mortgage.
• Sets a clear budget: Knowing how much you can borrow gives you confidence in your home search. You can focus on properties within your price range and avoid wasting time on homes outside your budget.
• Locks in an interest rate: A pre-approval often locks in your mortgage rate for a specific period (usually 90 to 120 days). This protects you from rate increases while you house hunt.

Step-by-Step Guide to a Mortgage Pre-Approval

1. Check Your Credit Score

Your credit score is one of the most important factors in determining the mortgage rate and amount you’re pre-approved for. Lenders use your score to assess how risky it would be to lend you money. Typically, a score of 680 or higher is ideal for getting competitive mortgage rates.

Tip: If your credit score is lower than you'd like, take steps to improve it before applying for pre-approval. Paying down debts, correcting errors on your credit report, and ensuring bills are paid on time can all boost your score. If you need assistance with repairing your credit, contact us directly at [email protected] and we would be happy to help.

2. Gather Your Financial Documents

Lenders will ask for several key financial documents to assess your ability to repay a mortgage. These can include:

• Proof of income: These can include recent pay stubs, an employment letter, T4 slips, Notice of Assessments, or if you’re self-employed, a copy of your past 12 months business bank statements, financial statements, and/or past 2 years Notice of Assessments.
• Employment verification: A letter from your employer verifying your position, salary, and length of employment.
• Debt information: Details on any outstanding loans or credit card balances. This is typically confirmed with a Credit Report inquiry through either Equifax or TransUnion (the two common credit reporting agencies in Canada)
• Assets: Proof of savings, investments, or other assets you may use for your down payment or closing costs.

Being organized with these documents can speed up the pre-approval process and demonstrate your financial preparedness to lenders.

3. Determine Your Down Payment

In Canada, the minimum down payment is:

• 5% for homes priced up to $500,000
• 10% for the portion of homes priced between $500,000 and $999,999
• 20% for homes priced at $1 million or more

Your down payment will influence the type of mortgage you qualify for and whether you need mortgage insurance (required if your down payment is less than 20%).

NOTE: Effective December 15, 2024, new mortgage rule changes in Canada will allow you to have an Insured Mortgage on properties up to $1.5M purchase price (presently capped at $1.0M purchase price)

4. Shop Around for Lenders

You don’t have to settle for the first mortgage offer you receive. Different lenders can provide different rates, products, terms and conditions. This is where working with a mortgage broker can make a huge difference. We have access to a wide range of lenders and can help you find the best possible product for your situation. We’ll handle the negotiations, so you don’t have to. Mortgages are more than just a rate --- we can help you find a product that would be in line with your short-term and long-term goals, helping you manage your cashflow and be mortgage-free years sooner!

5. Submit Your Application

Once you've gathered all the necessary documents and selected a lender (or worked with a broker to do so), it’s time to submit your pre-approval application. Your Mortgage Broker will assess your financial profile and issue a pre-approval letter if you meet their criteria.

What Happens After You’re Pre-Approved?

After getting pre-approved, you can start shopping for your dream home with confidence. Remember, the pre-approval letter is typically valid for 90 to 120 days, depending on the lender. If you don’t find a home within that time, you may need to re-apply for pre-approval. Don't worry, your mortgage broker will take care of this for you.

Also, be mindful of your financial activity during this time. Major changes, like taking on new debt or changing jobs, could affect your pre-approval status.

Benefits of Getting Pre-Approved for a Mortgage

• Faster closing process: Once you’ve found a home, the final mortgage approval process will be much faster since you’ve already provided most of the necessary documents upfront.
• Negotiation power: With a pre-approval, you can negotiate with sellers from a position of strength. In competitive markets like the Greater Toronto Area, this can be the difference between securing your dream home or losing out to another buyer.
• Peace of mind: You can focus on finding the right home without worrying about whether you’ll be approved for financing.

Conclusion

Getting pre-approved for a mortgage in Canada is a crucial step in your home-buying journey. By understanding the process, preparing your finances, and working with a trusted Mortgage Broker like Deepak Bansal, you can increase your chances of securing your ideal home in this competitive market.

Ready to get pre-approved?

Contact Deepak Bansal at 416-347-9292 or [email protected]