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Pre Approval Do's and Dont's
November 6, 2024 | Posted by: Christopher Chanakos
Navigating the Homebuying Process: A Guide to Mortgage Pre-Approval
For most Canadians, purchasing a home is the largest financial decision they'll ever make. While the process can seem overwhelming, breaking it down into manageable steps can reduce stress and make the journey much smoother.
Step 1: Start with Mortgage Pre-Approval
The first essential step in your homebuying journey is obtaining mortgage pre-approval. This gives you a clear understanding of what you can afford. However, not all pre-approvals are the same. Many are simply a rate hold, which means they are based on your income and credit score but do not take other factors, like the property itself or down payment verification, into account. Today, we'll review the Do's and Don'ts of mortgage pre-approval.
Mortgage Pre-Approval Do’s
Contrary to what some may think, the first step isn’t to contact a realtor and start touring homes—it’s applying for a mortgage pre-approval. Your mortgage broker will gather the necessary documents and work on your file, helping you avoid surprises and ensuring you meet the subject removal deadlines.
While contacting your current bank might seem convenient, working with a mortgage broker can give you access to a wider variety of lenders. This means not only can they help you secure the best rate, but they can also help you find the right mortgage product for your needs. Remember, rate is just one factor to consider—pre-payment options, penalties, portability, and customer service are also crucial components.
Most pre-approvals are valid for 90-120 days. The best part is that if interest rates drop during this period, you may be entitled to a lower rate. This means your rate hold is a worst-case scenario, and it can only improve.
Preparing Your Documents
To make the process smoother, ensure you have the necessary documents ready. Here’s a list of the essentials:
- Identification: A copy of your driver’s license or passport.
- Income Verification: Your two most recent T4s and NOAs (or T1 general for the self-employed).
- Proof of Employment: A letter from your employer detailing your position, length of employment, and salary. Include a recent pay stub to show your year-to-date income.
- Proof of Assets: Documents detailing assets like vehicles, properties, savings accounts, and RRSPs, which will help the lender calculate your net worth.
- Liabilities: Information on any debts, including student loans, car loans, mortgages, and credit cards.
Keeping these documents in one location—digitally organized—will save time and make the process easier for everyone involved.
Regular communication with your broker is key to a smooth experience. Whether by phone, email, or in person, be sure to keep them updated on your availability and preferences. If you’re planning to be out of town, inform your broker so they can reach you if necessary.
Once you’re pre-approved, you’ll receive a document outlining the loan terms, interest rate, and mortgage amount. Be sure to review this carefully to ensure everything is correct.
Mortgage Pre-Approval Mistakes: The Don’ts
Once your pre-approval is submitted, avoid making significant financial changes that could impact your mortgage approval. Here are a few things to steer clear of:
- Don’t Make Large Purchases: Avoid buying a car, taking out a loan, or charging large amounts to your credit cards before funding. If you're planning a major purchase, consult your broker first to ensure it won’t affect your debt ratios.
- Don’t Apply for New Credit: Refrain from applying for new credit cards, loans, or co-signing loans for others, as it can negatively affect your approval.
- Don’t Change Jobs: Stability in employment is crucial for mortgage approval. A job change or self-employment could complicate matters. If a job offer arises during your homebuying process, speak with your broker to explore any exceptions.
- Don’t Move Money Between Accounts: Any substantial deposit that’s not payroll may need to be explained. Moving money around unnecessarily can complicate the verification process, especially for down payments.
- Disclose Gifted or Borrowed Down Payment Funds: If you're receiving a gift or borrowing funds for your down payment, be sure to inform your broker. Many lenders accept gifted funds from immediate family, but the guidelines may vary, and borrowed down payment funds can impact your debt ratios.
Conclusion
Preparation is key to ensuring a smooth and stress-free homebuying experience. The more promptly you provide your broker with the necessary documents, the sooner they can address potential issues. After all, buying a home should be an exciting and enjoyable journey.