Many people believe that their first step in buying a home is contacting a realtor to start house hunting. What you’ve heard, is untrue. Buying a house doesn’t start in an open house or with a search on MLS, it starts in a mortgage broker’s office. Why? Well, before you start shopping for a house, you should get pre-approved for a mortgage. A mortgage pre-approval means that a lender has stated that you qualify for a mortgage loan. During this process, a lender will look at your finances to evaluate the maximum amount they can lend to you and at what interest rate. This amount then becomes your home budget. All serious homebuyers start with a mortgage pre-approval. If you’re wondering why, below is a thorough explanation of the advantages that getting a mortgage pre-approval gives you before you start house-hunting.

It saves time in your home search

When you start shopping for a house without any idea of what your maximum budget is, it can feel as though your options are endless. Having a pre-approval will help narrow down your options because you’ll know exactly what price range to look in. Particularly if you’re a first-time homebuyer. Before you fall in love with a property that’s way out of your price range, get pre-approved first. Go into your house-hunting journey with more realistic expectations and only spend time looking at homes that fit within your budget.

It improves your chances of buying a home

Getting pre-approved by a lender shows sellers that you are serious about buying a house. Having a mortgage pre-approval will also show them that you are financially able to make the purchase in a timely manner. Especially right now where the housing market is very hot in Ontario, having a pre-approval can help your chances of becoming the winner offer in a price war.

It gives you a better estimate of your mortgage payments.

A mortgage pre-approval will also show what your monthly mortgage payments will look like, allowing you to create a financial plan to pay for your new home. If you find that your monthly mortgage payments are too high, you can shop for a house in a lower price range. Just because a lender pre-approves you for $750,000, for example, does not mean you have to buy a home at that price point.

Lock in an interest rate

A great perk about getting pre-approved for a mortgage is that it provides you with a mortgage rate guarantee. Typically, when you get a mortgage pre-approval, it is valid from anywhere between 60-130 days (depending on which lender you go through). Most often it’s valid for a 90-day window. During that time period, the mortgage rate you were approved for will not change, even if interest rates increase. If mortgage rates decrease lower than what you get approved for, the lower rate will be honoured at the time your mortgage paperwork is actually processed.

What factors influence your mortgage pre-approval?

Now that you know why getting pre-approved for the mortgage you need is a smart decision. You might be wondering how lenders decide on how much a person gets pre-approved for? It comes down to a few major factors:

• Credit score: To lenders, your credit score is an indicator of your financial health. Essentially, it shows lenders how risky it may be to lend you money. A credit score between 800-900 is considered excellent, between 700-800 is good, but anything below 600 means your credit needs some improvement.
• Down payment: Your down payment is a large sum of money you plan on putting towards your house right away. In Canada, the minimum down payment you can make is anywhere between 5-20% of the home’s value (depending on the price of the house you are looking at). For more information about minimum down payments, click here.
• Debt service ratio: Your debt service ratio is the amount of your income that is dedicated to servicing your debts. This ratio allows lenders to decide if you are financially able to pay off your current debts along with paying back your mortgage loan
• Documentation: Along with the 3 above factors, you will need to provide lenders with the following documentation:
  • ID (SIN number, drivers’ license/passport, etc.)
  • Bank account/investment statements (along with other debts and loans)
  • Proof of assets (cars, boats, other properties, etc.)
  • Proof of income (paystubs, T4 slips, etc.)

Things to avoid doing before/while getting approved for a mortgage

Along with all the things you should do when getting pre-approved for a mortgage, there are also a few things you should avoid doing:

• Don’t change your job: Lenders want to see a steady job history when looking at your application. Normally at least 2 years of steady employment will suffice. However, if you’re frequently changing jobs, you could be labelled as a risk for lenders. If you must change jobs, be sure it’s in the same industry you are currently working in.
• Don’t apply for new credit: Your debt level and available credit are both major influencers in the mortgage approval process. So, avoid co-signing for friends or family and don’t apply for new lines of credit or credit cards.
• Don’t make other major purchases: Between pre-approval and loan finalization, avoid any major changes to your finances. This includes any big purchases like buying a home or boat for example. If you do make a big purchase, it can result in a loan rejection.
• Don’t just go to your bank and settle on that mortgage rate: When getting a pre-approved for a mortgage, don’t walk into the first bank you see and accept their mortgage pre-approval. Every lender is different, which means what you get approved for by one lender can be very different from what another lender is willing to loan you.

Work with a mortgage broker and get pre-approved for the best rate possible not just the only rate!

Mortgage brokers have access to thousands of lenders & can show you the best mortgage loan you can get pre-approved for and why it makes more sense to opt for one over the other. Ready to take your house buying journey seriously? Work with me, Darren Robinson, today! I can not only help you get pre-approved, but I can break down the mortgage application process and simplify it for you too. I can help you save tons of time, money, and effort while working with your best interests at heart. Book a free virtual consultation with me by clicking here or give me a call at 705-315-0516. Set yourself up for success by having a mortgage pre-approval in hand and ready to go before you start house hunting for the place you’ll call home!