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Have you added your dream home to your wishlist? But not sure which price range you should go for? During this home buying journey, you might come across the terms- mortgage approval and mortgage pre-approval. Mortgage refers to using a loan for procurement and maintenance of house, land or other real estate properties. The need for mortgage approval arises when a person needs a loan to buy the house they’ve been dreaming of.
In this blog, we will help you understand the meaning of mortgage pre-approval, its process, tips and factors that affect your mortgage approval.
A mortgage is the amount of money borrowed by the homeowner from the bank in order to use it to purchase a house. But how much money will the lender be willing to loan you? This is where you need mortgage pre-approval. It is a tool that determines the amount of money you will be able to raise from the lender at a given risk.
In Canada, a lender pre-approves a mortgage after factoring in the borrower assets, liabilities, credit score, income, and debt-to-income ratio. Mortgage pre-approval allows its Canadian borrowers to enjoy the following:
Lock the offered interest rate for 60-130 days,
Get an estimate on the mortgage payments,
Get a maximum figure of mortgage qualification.
For example, a person visits a bank to get themselves pre-approved for a mortgage. The bank after running a background check provides the borrower with CAD 350,000 mortgage at 3.5% The borrower will now search for a house that fits the mortgage rate and down payment offered by the buyer.
Getting pre-approved for a mortgage is the first step toward your dream home. It is a tedious process but an important one. The process to get pre-approved for a mortgage is:
The most tiring and strenuous process is assembling the various documents needed for pre-approval of the mortgage. The lender verifies the financial health of the person before getting started with the mortgage application. The documents one needs to submit for mortgage pre-approval are:
Government authorised details on personal information like marital status, age, occupation, etc.
Current financial status information,
Documents reflecting debts like child support, credit card information, student or personal loans etc,
Confirmation of down payment,
Consent to run a credit history search,
Current property documents like recent mortgage statement, legal description, bill statement, and property value,
Proof of employment for income confirmation
Before starting the process of house hunting, one must understand when to initiate mortgage pre-approval. It lets you know the amount of money the lender will be willing to provide you. This new fund knowledge of estimated mortgages will allow you to focus on houses within your budget.
The ideal time to get pre-approved is before hunting for a house and letting the lender know you are a serious buyer.
Once you've made your mortgage application, the next step is to check you credit profile.. The lender checks your credit score to determine how much of a credit risk you are. In Canada, the ideal credit score is considered to be 680 or above and is termed ‘good’. However, if your credit score is between 600-680, your case will be forwarded to an A-level lender, otherwise you will be qualified for a B level lender. You can check your credit score online or at Equifax. If you find your credit score to be low, the following tips can help you bring it to the ideal level:
Pay-off the debs with higher interest rates,
Try to increase your income,
Pay bills on time,
Avoid any big purchases
Have you received your mortgage pre-approval letter? This means your interest rate has been frozen for the next 90-120 days, the task for you is to find a house within this time frame. Canadians can purchase a house at the same rate of interest on mortgage even if the rates increase. A real estate agent in Canada will want to check the pre-approval letter received by you after which they will show you the houses. The mortgage pre-approval letter can also be shown to the seller when the house is purchased.
The decision of the lender pre-approving your mortgage mainly depends on a number of crucial factors.. Given below are some of the factors that affect your mortgage pre-approval:
The borrower mortgage pre-approval depends upon their credit score. By checking the credit score, the lender establishes the balance that the borrower has maintained with credit. The ideal score is considered to be 680 or higher in Canada. The score is achieved after all the debt repayments, the number of existing loans and the payments of credit cards and other bills.
The number of debts or liabilities a person has in addition to the proposed mortgage, is one of the factors that influences the lender decision. Higher the debt, higher the interest rate, lesser the amount of pre-approval and the chance of mortgage approval being diminished.
The stable income of a borrower vastly affects the mortgage pre-approval rate.. The employment status of the borrower plays a role in the pre-approval process, the lender feels assured when they see a stable source of income. If a person is self-employed, they need to provide the lender with proof of their income being steady for several years.
A lender calculates your DTI ratio before mortgage approval. This ratio explaining your balance between your income and your debts gets you a chance for higher mortgage pre-approval. The lender determines how much of a credit risk you are. If you have a high debt-to-income ratio, the chances for a mortgage pre-approval are diminished.
Even though this does not seem like a big issue, the borrowers personal life has a lot to do with their mortgage pre-approval. The fact that they have a child to support or parents to take care of, their increasing age or a partner with no source of income affects the lender decision.
The following tips can get you pre-approved for mortgage in no time:
Raise your credit score
Increase your debt-to-income ratio
Ask for help from mortgage brokers
Understand the process of mortgage pre-approval
Function within your budget
Do not get swayed by the pre-approval amount. It might not be what you are offered at the time of mortgage approval
Notice the time of your pre-approval
Applying for a mortgage pre-approval is the first step one needs to do before hunting for a house. A pre-approved mortgage allows a person to have an estimate on the price of the house they need to look for. Also, the rate of interest agreed upon at the time of pre-approval gets locked for up to 120 days in Canada, so the buyer has this time frame to search for a house and finalise the deal.
In order to get mortgage pre-approved, one needs to submit the following documents with the bank or the lending agency:
Identification
Proof of employment
Proof you can pay for the down payment and closing costs
Information about your other assets, such as a car, cottage or boat
Information about your debts or financial obligations
Documents Proving Employment:
Proof of your current salary or hourly pay rate (for example, a recent pay stub)
Your position and length of employment with the employer
Notices of assessment from the Canada Revenue Agency for the past 2 years, if you’re self-employed
Documents Proving Debts or Financial Obligations:
Credit card balance Statements
Child or spousal support
Car loans
Lines of credit
Student loans
Any other debts
Mortgage pre-approval is different from mortgage approval even if it is the first step to it. Once the house is finalised, the borrower submits the property details to the lender asking for mortgage that had been pre-approved. The lender holds the power to accept or reject the pre-approved amount. This decision of the lender will be based on the property meeting their requirements.
Also, the amount pre-approved is the maximum amount the lender will be willing to give as mortgage. This necessarily does not mean that the person has to look for a house complimenting the pre-approved amount. The lender at the time of approval would not be willing to sanction the pre-approved loan.
Home is where your heart is. It is a warm presence that embraces all your flaws. Give your home your best and be wise when you go for mortgage pre-approval. We hope you have a better understanding of the terms that affect your mortgage approval.
Ans. Yes, a newcomer can still get a mortgage approval. Since you will not have the ideal credit score, you can still apply for a mortgage through the ‘Newcomer to Canada Program.
Ans. The mortgage pre-approval process can take up a few weeks.
Ans. One can visit various lenders in search of the best rates on mortgage and choose the best deal.
Ans. One your mortgage is pre-approved, the interest rates remain the same for you even if they have increased. Rates are frozen at the time of pre-approval and remain unchange for the next 90-120 days.
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