Can I buy a house? How much can I afford? All these questions lead back to one thing, a mortgage pre approval. However, to start, what is a mortgage pre approval? This is the process where a lender approves or declines to you for a mortgage before you make an offer on a home.
A system generated pre approval is when you complete a pre approval application with a bank or lender and a computer reviews it and quickly sends back the pre approval results. Many banks provide this type of pre approval however it’s important to note that the application has not been fully reviewed by an underwriter. A good indication of if you have received one of these system generated pre approvals is at the bottom it will say rate hold only or subject to full underwriting at time of purchase. Unfortunately these pre approvals are not very in depth and leave a lot of areas where challenges may arise once an offer is made.
A full review happens with when an underwriter at a bank or lender has personally reviewed your application. They will look at details such as your income and more so, the type of income. Plus, your credit history and they may be in touch with additional questions to help with their review. This is a great pre approval to have, to assure success once an offer is made. It is the most thorough review.
When speaking to a bank or lender about a pre approval it’s important to ask them which type of pre approval they provide. If it is a system generated one, you may be best to seek a pre approval with another lender or a mortgage broker. A mortgage broker will assist as they know already which lenders provide full reviews and which lenders provide system generated reviews. The best mortgage broker in Ottawa is there to answer all your questions from 'what is a mortgage pre approval?' to 'can I buy a house?' and 'how much can I afford?'.
Learn more: How much can I afford?
A pre approval is not mandatory. If you have already found a home that you would like to make an offer on then you can jump right into a formal approval review. The main difference between the pre approval review and the formal approval review is that documents are collected and reviewed with a formal review. Also, an updated credit check is typically done. Plus, the house itself is reviewed at this time.
If you have not found a house though and you would like to start looking for a home, a pre approval is a great idea and has many benefits.
A pre approval means that you can go look at a house and know if you can qualify that house price or not. This will help you save time by not looking at homes that are outside your price bracket.
A pre approval helps you make an offer with more confidence or in some cases an offer without any financing condition. It would be unfortunate to spend time finding the perfect home only to have the financing fall through. A pre approval upfront will help ensure that you can make a strong offer knowing exactly what you qualify for. Also when negotiating the price and knowing your upper limit, you will be able to have more clarity on how high you are able to go. This can be especially helpful when competing against others for the same home in a bidding war.
A pre approval can help you understand and prepare for the documents needed once an offer is made. There are quite a few specific documents needed when buying a home and the more time upfront you have to collect them, the better.
The pre approval review also helps with budgeting to know what an approximate payment will be on the different prices of homes you were looking at.
Learn more: Mortgage payment calculator
As the application is already done with a pre approval you can make the purchase process go smoother by having some of the work done upfront.
Buying a home is a major purchase and the more work done upfront, the more chances of a mortgage approval.
Now that you know more about 'what is a mortgage pre approval', here are some of the main steps you can take when looking for a mortgage pre approval.
It’s important to personally review your finances beforehand to have an idea of your current income, debts and expenses. From this, you will know how much money you have at the end of each month that can go towards the mortgage and the various costs associated with owning a home. You will also be able to see if there are any areas of your finances that can be improved. For example, paying off some current debt. Also, you can see within your review, what type of mortgage payment you may be most comfortable with. Sometimes a lender will pre approval you for more than your personal comfort level.
Talk to a mortgage broker to explore the different lenders and types of mortgages available. For example there are fixed rate mortgages and variable rate mortgage is. There are interest only mortgages as well. If you’re looking at a fixed rate mortgage there are terms ranging anywhere from six months up to 10 years.
Learn more: Fixed rate mortgage
A lender will require your personal and financial information to help them with their pre approval review. A lender will look at your:
Your credit report shows the history of the various debts you have had over the years and if you have had any late payments on these debts. Also if you have had any debt in collections. Plus, it has your previous employers and addresses. From your credit report, the lender will also be looking to your credit score. The higher the number the better.
A lender will look to how much you make but also your type of employment such as if you are contract, self-employed, hourly, commission and more.
A lender will look at the current debts you have and also the type of debt. Different debt is looked at in different ways in an application. For example, a car loan payment and a credit card payment are taking into account differently in the mortgage application.
A lender will look at if you have any savings. These can be in the form of RPSP, TFSA, your bank accounts and so on.
Learn more: RRSP for a down payment
There are some restrictions in regards to where your down payment can come from. For example, it cannot come from a personal line of credit or cash advance on a credit card. The down payment typically needs to come from a family gift or from your own personal savings.
Learn more: Down payment on a house
A full review pre approval is one of the only ways that you can be sure that once you have found a house and made an offer, you most likely will be successful in a obtaining a mortgage approval.
Any do it yourself online applications, or applications that promote a mortgage pre approval within minutes should be avoided as these will obviously not come with a full in-depth review by a lender.
You only need one full review pre approval so having one from different banks that you may want to look for a mortgage at is not necessary. Also, each time a mortgage pre approval review is done, a credit check is completed and this costs you credit score points.
Typically a mortgage pre approval lasts up to 120 days at most traditional banks. The pre approval is usually combined with a rate hold for that period of time as well. With a mortgage broker, a pre approval can last indefinitely as long as your financial condition does not weaken from the point of application and/or mortgage rules have not changed in a way that have negatively affected your application.
However, any documents provided during the pre approval stage will usually need to be refreshed once an offer is made. Lenders typically cannot accept documents more than 30 to 60 days old.
What is a mortgage pre approval? Even with a pre approval, there is still a chance the mortgage could fall through. Some reasons for this are:
The pre approval is based on your current financial situation or the financial situation you will have prior to closing on the new house. If for example you are pre approved based on paying off any debts. If those debts are not paid off, then the pre approval would not be valid. Also, if the pre approval is based on selling your current home, if your current home does not sell then the pre approval will not be valid. Lastly, if the pre approval for example is based on having a good credit score, if you missed payments on debts and your credit score drops, this could affect your pre approval.
Typically when being pre approved, the pre approval is not looking at the property itself. Not all lenders finance all properties and the property you are purchasing might not fit the lender's guidelines. An example is a condominium with very small square footage. Also, if you pre approved for a home value not taking condo fees into account, if you end up buying a condo, the condo fees could affect the application negatively. Another example is that you are pre approved for a cottage however the cottage does not meet the lender's guidelines like having year round access.
Learn more: Cottage mortgage in Ontario
In Canada, a benchmark qualifying rate is used to qualify you for a mortgage. If this rate increases after you were initially pre approved, this can affect your pre approval. It’s important to stay in communication with your mortgage broker to ensure that your application stays up-to-date with any changes in mortgage guidelines.
Contact me today to help answer all your mortgage questions, including 'What is a mortgage pre approval?'.