Understanding the Importance of Pre-Approval

Understanding the Importance of a Mortgage Pre-Approval

House hunting can be daunting, especially when facing competing offers.  Being Pre-Approved for a mortgage is a game-changer, providing a clear picture of your borrowing capacity and giving you a competitive edge in the real estate market.

What is a pre-Approval 

A Mortgage Pre-Approval is the step before a mortgage application, where you share financial information with your lender and in turn, you’re given an estimate on what you’ll be able to borrow.  Pre-Approvals are typically valid for 60 to 120 days, depending on the lender.

Five Essential Components for Pre-Approval

• Identification: Your lender will need to verify your identity, so each applicant will typically need to provide two pieces of identification

1. • Government-issued ID (ex. Driver’s license or passport)
   • Secondary ID (Ex. SIN card, signed Bank or Credit card)

• Employment and Income Verification:  Lenders typically want to see two years of steady income.  If you’ve recently started a new job, this doesn’t necessarily mean you’ll get a ‘NO’, but you may need to provide details of your previous employment to prove consistent income.
  • Employment letter with start date, position and pay (hourly/salary)
  • Recent pay stubs or bank statements confirming deposits
  • T4’s for the last two years or T4A’s for other income (pension etc)
  • Notice of Assessments for self-employed individuals
  • In addition to employment income, you also may be able to use
    • Retirement income, such as CPP or your RRSP
    • Support payments, such as spousal support or Child support
    • Rental Income
    • Investment Income, such as interest payments and dividends

• Proof Assets: Lenders need to see that you can cover the Down Payment, as well as additional expenses such as Closing costs, including legal and legal transfer fees.  These are typically equivalent to 1.5% – 4% of the purchase price.
  • Your Down Payment must be a minimum of 5% of the purchase price for properties for $500,000 or less.  When the purchase price is above $500,000 – but below a million – the minimum down Payment is 5% on the first $500,000 and 10% on the remaining portion.
  • Your Down Payment can come from traditional sources, such a Savings, Investments (including your TFSA or RRSP via the Home Buyers’ Plan), the Sale of another property, a non-repayable Gift from a relative, or a Home Equity Line of Credit.
    • Bank Statements
    • Investment account statements
    • Gift Letter

• Total Debt and Monthly Expenses: Your Total Debt Service should not be more than 44% of your gross monthly income.  The formula for calculating TDS is: Housing expenses + Credit Card interest + Car payments + Loan payments / annual income.
  • You need to prove to your lender that you can carry the costs for your property as well as service any existing debts
    • Credit card statements
    • Lines of credit statements
    • Car loan statements
    • Student loan documents
    • Any other debt-related documents

• Proof of Good Credit:  Your Credit score is a three-digit number between 300 and 900 that shows how well you manage credit and in turn, informs lenders how risky it would be to loan you money.  While lenders have their own benchmarks for evaluating risk, a good credit score starts at around 660.
  • Credit Score
  • Authorization for a hard credit check during the Pre-Approval  process.

Not only does your Credit Score affect your ability to be Pre-Approved for a mortgage, higher Credit Scores generally get you a lower interest rate.

Getting Pre-Approved for a mortgage is an important first step in the buying process.  You’ll be more prepared knowing how much you can afford to spend, and what your monthly payments will look like.  Your lender will see you as a qualified borrower, reducing the amount of time-and-stress when it comes time to make your mortgage application.

Original article: www.forbes.com