Buying a home, whether it’s for the first time or the fiftieth time, can be a big deal. There are so many things to think about and the process can be tough to understand. One thing that can help put your mind at ease is getting pre-approved for a mortgage. Just by having that letter in your hands can make you, and the seller, feel a whole lot better about things. It will let you know exactly the price range of house you should be seeking, and it will also let you be able to put an offer in on a house as soon as you see it. For the sellers, it will let them know you are serious about looking for a house and have the money all set for when you need it.
Right now, you might be asking yourself “what do I need for a mortgage pre-approval?” Luckily, the mortgage pre-approval requirements are fairly straightforward and easy to understand, as is the mortgage pre-approval process. All you need is to provide some documentation, answer some questions about your financial history, and know what your down payment is going to be. After that, you get to sit back and sift through the offers from the various banks and lenders.
What’s My First Step Toward Getting Pre-Approved?
The absolute first thing you should do is look at a mortgage pre-approval calculator. Canada has many different requirements when it comes to their home loans, so the calculator will point you in the right direction.
The first thing the calculator will do is ask about your financial history. Be sure to be as honest as possible with the calculator, because it will be more accurate that way. Type in your annual income, any debts you have, your credit score, and a little bit about the property you have in mind. If you don’t have a house in mind yet, that’s okay, just go ahead and play around with the numbers a bit. This way, you can get a rough idea of the place you can afford.
Once all of those numbers are inputted, the calculator will come back with a figure. That number is a rough estimate of what your final purchase price of the home should be. Remember, things like down payments, condo fees, and mortgage insurance might make a slight difference in the number, but it will absolutely give you a jumping off point.
What Documentation do I Need to be Pre-Approved?
After you’ve played around with the calculator a bit, and like what it says, the next step toward mortgage pre-approval is to gather up your documentation. The banks or lenders will ask you for several pieces of information regarding your financial history.
- Employment – One of the very first things the lender will ask is for your proof of income. This gives them an idea of how much money you have coming in, so they know how much to give you for the home loan. You’ll probably end up needing your paystub, tax returns, your employment history for the last three years, and a letter from your employer stating how long you’ve worked at your current job and the salary you receive. If you are self-employed, you will also need your income tax returns for the past two years.
- Previous Addresses – Along with the employment history, you will also need to provide your last three years’ worth of addresses. It simply helps the banks and lenders to know they have the right person and are checking the right credit history, especially in the cases of family names or people with common names.
- Debts and Assets – The next thing you will need to have on hand is a list of all of your debts and assets. You need to list everything out, from car loans and student loans to retirement accounts and bonds. Again, this will let the bank see exactly how much you have going out in relation to how much you have coming in.
- Down Payment – The amount you are able to put down on a house makes a huge difference in the end-game. Most banks require you to have at least 5% to be able to put toward a house, but there are some programs in place to help you out if you cannot make that. Also, if you do not have at least 20% of the purchase price, you will be required to buy mortgage insurance. The mortgage insurance can be paid up front or rolled into your monthly mortgage statement. Once you buy it, however, it stays with you. So even if you move houses, you can keep your current insurance.
Do I Need to Have a Credit Check?
Yes. Having your credit checked is an important part of the home buying process and every single bank or lender will ask for your credit score and history. This will give the lenders a very good idea of your spending habits and making sure you spend within your means. With this information, the lenders and banks can put together a reasonable estimate of how much you can afford to spend on a home and how much your monthly payment should be.
Don’t worry, though. The process for having your credit checked is actually very simple. All you need to do is sign a document giving permission for the broker or lender to take a look at it. It’s usually just a one-page permission form that you can fax back and forth within the same day. Once that is done, they will get back to you with their offers.
Remember, the simple act of having your credit checked can lower your credit rating. If you’ve ever looked carefully at your credit report, you’ll see that there’s a line for “number of inquiries”. One way to avoid having your credit score lowered during the home-buying process is to use a broker. This way the information is only exchanging hands once, and the broker can then pass on that information to the various lenders and banks.
Who Should I Contact to get Pre-Approved?
Once you have all of your documentation in order, you can start calling banks and lenders to ask about their pre-approval. In fact, many of them have the paperwork right online, making it really convenient for you. When you contact them, be sure to ask about the amount for which you qualify and the interest rate. You might be surprised to learn that each bank or lender will have a different answer for you. It’s important for you to do your homework, so you can get the best rates.
In addition, you can talk to a mortgage broker. A mortgage broker is someone who will take on the work of contacting the different banks and lenders on your behalf. It’s their job to shop around for you and get you the best possible rates. The broker will then get back to you and discuss your options. Don’t worry about cost, because mortgage brokers get a commission from the lenders, so you don’t have to pay a single cent.
What Can Getting Pre-Approved do for Me?
Having a pre-approval letter in your hands can do a lot toward making you secure in buying a house. As stated before, you can walk into a house and be relatively certain you have money waiting for you. This makes it so much easier to put an offer in right when you see the house you want.
In addition, once you are pre-approved, your interest rate is usually locked in anywhere from two to four months. This gives you the opportunity to take your time and pick the house you really want and not feel rushed into any kind of decision. When you speak with the lenders, make sure you ask them exactly how long the rate is locked in. It will give you a clear direction and goal for your house purchase.
Getting pre-approved for a mortgage can also save you a lot of time during the house hunting process, because it can give you an idea of how much you can afford. If you started the search looking at houses for $700,000 but end up getting approved for $500,000, you know you have to either scale back your search or bide your time until other things settle down.
Does Getting Pre-Approved Guarantee A Home Loan?
Yes! Once you get pre-approved for a home loan, that number is locked in for you. You can then shop for houses with the confidence of having the money there to back you up. Buying a house is hard enough on its own, so anything that can help speed up the process a little is refreshing and welcome.
Some banks and lenders will try to pre-qualify you, which is entirely different. While it can be a little handy to know where you stand with some banks, in most cases, the pre-qualification step isn’t necessary toward your home purchase. Pre-qualification is a way banks try to get your business without looking at any of your documentation. They’ll probably ask you a few cursory questions, but they require none of the proof required for pre-approval. One thing the pre-qualifiers are known for is promising a low interest rate to get you in the door, but once they have all of the documents and paperwork, suddenly that rate becomes much higher than you were originally promised. In the vast majority of cases, you can safely skip the pre-qualification step.
Instead, make sure you get the pre-approval letter. This proves to the sellers that you have shown the documentation necessary and you are ready to buy a house. Again, be sure to check how long the interest rate and mortgage amount are locked in; it will save you a lot of headaches as you go to look for your house.
What Happens if I Can’t Get Pre-Approved? Am I Stuck Without a House?
Absolutely not. If you can’t get a pre-approval at the moment, all is not lost. Most of the time, the bank or lender will tell you which areas you need to address in order get a home loan. For example, if your credit score is the problem, you know you need to pay down some credit cards or let some of the older things drop off the list. Most of your credit history will drop off after seven years.
Also, there are lots of programs in place to help people get into a house, even if they might be considered to be a risky venture for the lender. If you have a disability, if you’ve served in the military, if you’re retired, or if you’re a first-time home buyer, there are all kinds of incentives and options for you to buy a house. Just be sure to look into those or talk to your broker about what’s available.
Truly, the size of your down payment makes a huge difference when you go to buy a house. If you can save or be gifted enough of the money to make up 20% or more of the purchase price, the mortgage insurance is no longer a cost for you to consider. By having that much of a down payment, it lets the banks and lenders know you are serious about buying a house and you have the financial ability to save that money. It helps them look at you in a whole new light.
Additionally, many brokers and lenders have their own programs in place to help you get into a house. With more and more houses sitting vacant, not bringing an income, the banks want to see them getting sold. A broker can talk to you about foreclosures, bank-owned properties, or other unconventional ways of buying a house.
Whether you’re just starting the pre-approval process, you have a home in mind, or you want to play around with the mortgage calculator, be sure to contact Steven Owens at www.mymortgagebroker.com or 403-870-2669. He, or his friendly staff, can answer any and all questions you have about getting pre-approved and help you out every step of the way. This way, when you are ready to close and secure your home loan, you know you have a trusted broker behind you.