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Understanding How to Get a Pre-approved Mortgage

Understanding mortgage pre-approvals

A mortgage pre-approval provides you with the information necessary to help you determine the maximum amount that you’ll be able to afford to spend on a home, the monthly mortgage payment based on your maximum price, and at what rate and term it will be based on.

There is no charge to get pre-approved and, at this point in the process, there is no commitment. Pre-approvals typically have a 120 – 160 day guarantee, but this may vary from lender to lender. Getting pre-approved allows you to lock-in your rate, should interest rates increase as you’re making your home buying decision, but will not prevent you from taking advantage of a lower rate should they go down during that same time period.

How to get pre-approved for a mortgage

To get pre-approved, you’ll need to meet with a financial lending institution or a mortgage broker who will ask you a series of questions and prepare some documentation to determine how much you can afford to borrow toward the purchase of your new home.

There are 3 factors that help lenders determine how much you can qualify for:

  • Credit Score – A credit score depicts a person's creditworthiness. Lenders use a credit score to evaluate the probability that a person repays his debts. The higher the score, the more financially trustworthy a person is considered to be. Before you apply for a mortgage, it’s a good idea to get a copy of your credit report to make sure there aren’t any mistakes or surprises as lenders will be looking at your credit score.
  • Down Payment – At this point, your lender will need to know the amount that you intend on putting down towards the home’s purchase price. In Ontario, 5% of the value of the home is required as a down payment. If you want to avoid paying CMHC insurance, the minimum down payment goes up to 20% of the home’s purchase price.
  • Total Debt Service Ratio (TDS) – This is where your lender will look at your household income and compare it against your monthly household expenses to determine if there is money left over to service all existing debt in addition to any additional mortgage related debt as it relates to a home purchase.

Documentation requirements from lenders may vary, but most will typically ask for the following documents. So be prepared to provide them when asked:

  • Government-issued identification of all applicants.
  • Proof of income in the form of pay stubs or notice of assessments if you are self-employed.
  • Employment history.
  • Banking information including statements and investments as well as proof of down payment.
  • Information on other assets such as vehicles.
  • Information about your debts – line of credit, credit cards, car leases and loans, student loans, personal loans and spousal or child support payments.

Mortgage pre-approval limitations

Getting pre-approved does not automatically mean that your final mortgage application will be approved. Before a purchase offer can be approved, the details of the property must be reviewed to ensure that it meets all qualification criteria. For example, if the appraised value of the home is below the purchase price, the lender may deny the mortgage.

Planning and managing your mortgage

  • Ensure that you have room to breathe when financing your home. Plan for unexpected circumstances that may arise such as loss of income, or increased interest rates and expenses.
  • Consider electing to go with a smaller mortgage as opposed to the maximum amount that you qualify for. This will allow you to deal with unexpected circumstances should they arise.
  • Learn about how to get mortgage-free sooner. Look into making lump sum payments, doubling up on your mortgage or changing your amortization which can all contribute to paying your mortgage off sooner.

Another useful strategy for managing your finances as you prepare for a mortgage is looking into any tax credits and rebates you may be eligible for. CountryWide has you covered there as well.