Buying a new home can be a daunting process at the best of times. In fact, almost 60% of Canadians find moving home to be highly stressful, and almost a third of Canadians say that moving home is more stressful than starting a family or planning a wedding.
In recent years in many parts of Canada, buying a home has been a tough process for many homebuyers. With such a red-hot sellers’ market, navigating the potential landmines of bidding wars and unconditional offers was often exasperating.
Even though the market cooled somewhat in 2022, there are still a number of ways to make the process a lot easier; one of them is to get a mortgage pre-approval letter.
What is a mortgage pre-approval?
One of the most important aspects of house-hunting is knowing your budget. It’s difficult (and potentially costly) to start viewing homes without knowing how much you can actually afford. This is where a mortgage pre-approval comes in.
Most lenders can provide you with a mortgage pre-approval, which typically includes:
- The maximum mortgage amount
- The interest rate offered
- The amount of time the lender will honour the interest rate
When you add the mortgage amount to the amount you’ve saved for a down payment, you get the top end of your budget for buying a new home. The minimum down payment you’ll need is 5% of the home’s value, and to avoid paying mortgage loan insurance, you would have to put down 20% of the home’s value.
A word of warning: not all mortgage pre-approvals are created equal
It’s really important to understand that a mortgage pre-approval letter is not a legally binding document. It’s an estimate of the most you could borrow with a mortgage. However, the value of any pre-approval lies with the mortgage professional who put it together for you and how much of your personal financial information they took into account when preparing your mortgage pre-approval.
When you start to look into how to get a mortgage pre-approval, you may find that some (including some online mortgage pre-approvals) only require very basic financial information. The lender may ask you to provide general information about your income and any outstanding debts but they may not dig too deeply. Without a detailed financial analysis and a credit check, a mortgage pre-approval may not result in an actual mortgage approval once you put in an offer on a new home.
At that point, you’d need to pay a deposit, which is held in trust, usually by the home seller’s realtor or a lawyer. The actual deposit amount can vary from city to city, but it can be in the tens of thousands of dollars. The deposit amount will be subtracted from the total selling price when you close.
When you make your offer, you can include conditions that need to be met to take the sale forward. These can include receiving the necessary mortgage financing and having a home inspection that gives the property a clean bill of health. If any of the conditions are not met, you can walk away from the sale and get your deposit back.
However, if you don’t have a financial condition in your offer and find that your lender won’t provide the pre-approved mortgage amount, the sale could fall through, and you could lose your deposit. There are a number of reasons why a lender may renege on a pre-approved mortgage:
- Your credit rating is too low.
- Your income is not as high as you thought (this could be because some lenders don’t take into account self-employed or commission income).
- You have more debts than you realized, which skew your debt service ratios (the basis banks work from when deciding how much to lend you).
- Your savings are not enough to cover the down payment and closing costs.
Before giving you a mortgage pre-approval, a skilled mortgage professional should:
- Run a credit check (which tells them if you qualify from a credit-worthiness point of view, as well as confirming all of your debts).
- Ask to see statements of your savings accounts.
- Confirm the amount and type of your income.
This should improve the likelihood of the lender giving you a final mortgage approval with the same terms as your mortgage pre-approval.
The documents to provide for a more reliable mortgage pre-approval
When you start looking into how to get a more reliable mortgage pre-approval, make sure that your mortgage professional asks for similar documents you’d need when qualifying for a mortgage. These should include:
- Your SIN number (to pull a credit check).
- Identification (usually two forms, such as a driver’s licence, passport, etc.).
- Proof of your salary, along with your role and how long you’ve been with the company.
- List of debts, including credit cards, car payments, other loans, etc.
- Savings account statements to prove you’ve got the down payment and closing costs covered.
- RRSP statement if using these savings for the down payment.
- Notices of Assessment for two years if self-employed.
- Details of child and spousal support, if relevant.
- Details of any assets (such as a car, property, valuables, investments, etc.).
If the documents you provide are as thorough as when applying for a mortgage, your mortgage pre-approval should be reliable.
What to avoid doing after you have your mortgage pre-approval
If your financial and employment situations change significantly, you may not be approved for a mortgage once you put in an offer. To try and ensure that this doesn’t happen, it’s important that you:
- Don’t switch jobs. A new job, with a trial period, could derail your mortgage offer.
- Don’t take on new debt. Car payments, for example, could skew your debt service ratios and destroy your mortgage offer.
- Don’t apply for any credit products: this will affect your credit score.
It’s also important to remember that you don’t have to take out the maximum mortgage offered to you. The mortgage amount that fits in best with your financial plan could mean you having to look for a cheaper property.
How an IG advisor can help you get a reliable mortgage pre-approval
An IG advisor will work hand-in-hand with an IG Mortgage Planning Specialist to get you a more comprehensive mortgage pre-approval. They’ll also help you work out how much you should borrow to make sure your mortgage payments are affordable and that they fit in with your overall financial plan.
Talk to your IG advisor today to find out how to get a mortgage pre-approval that’s right for you. If you don’t have an IG advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.