Getting pre-approved for a mortgage is a crucial step in the home buying journey. A pre-approval not only gives you an idea of how much you can afford but also strengthens your position when negotiating with sellers. However, the mortgage pre-approval process can be overwhelming, especially if you’re new to the Canadian housing market. In this guide, we’ll walk you through the top 10 tips for a smooth mortgage pre-approval process in Canada, so you can embark on your homebuying journey with confidence.
Tip #1: Know your credit score
Your credit score plays a vital role in determining whether you qualify for a mortgage and the interest rate you’ll receive. Before applying for pre-approval, it’s crucial to know your credit score and understand the factors that influence it.
Request your credit report
In Canada, you can request a free credit report from the two main credit bureaus, Equifax and TransUnion. Review your credit report carefully for any errors or discrepancies that could negatively impact your score. If you find any inaccuracies, contact the credit bureau to have them corrected.
Understand credit score factors
Several factors contribute to your credit score, including payment history, outstanding balances, length of credit history, types of credit, and recent inquiries. Familiarize yourself with these factors and take steps to improve your score, such as paying bills on time and keeping credit card balances low.
Tip #2: Manage your debt-to-income (DTI) ratio
Your debt-to-income (DTI) ratio is a critical factor that lenders consider when evaluating your mortgage application. A lower DTI ratio indicates that you have a manageable debt load and are more likely to qualify for a mortgage.
| DTI Ratio Factor | Description |
| Definition | DTI is the percentage of your monthly gross income that goes toward paying your debts, including mortgage payments or rent, credit card debt, and auto loans |
| Calculation | Lenders calculate your DTI by dividing your monthly debt obligations by your pretax, or gross, monthly income |
| Ideal ratio | A good DTI ratio to get approved for a mortgage is under 36%, and most conventional loans allow for a DTI of no more than 45% |
| Importance | DTI is as important as your credit score and job stability, and a high DTI ratio was the most common primary reason for mortgage denials in 2020 |
| Tips | To improve your DTI ratio, avoid taking on more debt, don’t make any big purchases on credit cards before you buy a home, and wait to make a home purchase if your DTI ratio is exceptionally high |
Pay down existing debts
To lower your DTI ratio, focus on paying down high-interest debts like credit cards and personal loans. This not only improves your financial health but also increases your chances of mortgage pre-approval.
Avoid taking on new debt
While you’re working towards mortgage pre-approval, it’s essential to avoid taking on new debt, such as car loans or new credit cards. New debts can increase your DTI ratio, potentially impacting your mortgage eligibility.
Tip #3: Organize your financial documents
Lenders require a variety of financial documents to evaluate your mortgage application. Having these documents organized and readily available can streamline the pre-approval process and improve your chances of success.
Employment and income verification
Gather documents that verify your employment and income, such as pay stubs, T4 slips, and letters from your employer. If you’re self-employed, you may need additional documentation like tax returns and financial statements.
Bank statements and other financial records
Collect bank statements, investment account statements, and other financial records that demonstrate your financial stability. Lenders may also request documentation for any large deposits or gifts to ensure you have the necessary funds for a down payment and closing costs.
Tip #4: Determine your budget
Before seeking mortgage pre-approval, it’s essential to determine how much you can afford to spend on a home. This ensures that you don’t waste time looking at properties outside your budget and helps you avoid financial strain in the long run.
Calculate your monthly expenses
Create a detailed list of your current monthly expenses, including housing costs, utilities, transportation, groceries, and other necessities. This will give you a clear picture of how much money you have available for a mortgage payment.
Use a mortgage affordability calculator
Use a mortgage affordability calculator to estimate the maximum mortgage amount you can afford based on your income, expenses, and other financial factors. Remember to consider additional costs like property taxes, insurance, and maintenance when determining your budget.
Tip #5: Choose the right mortgage lender
Not all mortgage lenders are created equal. It’s essential to shop around and choose a lender that offers competitive rates, terms, and excellent customer service.
Research different lenders
Start by researching various lenders, such as banks, credit unions, and mortgage brokers. Each type of lender has its pros and cons, so consider your unique financial situation and preferences when making a decision.
Compare rates and terms
Once you’ve narrowed down your options, compare the interest rates, terms, and other features offered by each lender. Keep in mind that the lowest interest rate isn’t always the best deal, as other factors like closing costs, penalties, and prepayment options can also impact the overall cost of your mortgage.
Tip #6: Get pre-approved with multiple lenders
It’s a good idea to get pre-approved with multiple lenders to ensure you’re getting the best possible mortgage terms. This also gives you a better understanding of your borrowing power and can help you negotiate with sellers.
Understand the pre-approval process
Each lender may have a slightly different pre-approval process, so it’s essential to understand their requirements and what documentation you’ll need to provide. Be prepared to submit financial documents like pay stubs, tax returns, and bank statements.
Don’t overextend yourself
While it’s beneficial to get pre-approved with multiple lenders, be cautious not to overextend yourself. Too many credit inquiries in a short period can negatively impact your credit score, potentially affecting your mortgage eligibility.
Tip #7: Maintain your credit score
Your credit score plays a significant role in the mortgage pre-approval process. A higher credit score can lead to better mortgage rates and terms, so it’s essential to maintain or improve your score throughout the process.
Monitor your credit report
Regularly check your credit report for errors or discrepancies that could lower your score. In Canada, you can request a free copy of your credit report from either Equifax or TransUnion.
Practice good credit habits
To maintain or improve your credit score, practice good credit habits such as making timely payments, keeping your credit utilization low, and avoiding new debt. These actions can demonstrate to lenders that you’re a responsible borrower.
Tip #8: Gather necessary documentation
The mortgage pre-approval process requires various documents to verify your income, assets, and debts. Gathering these documents in advance can help streamline the process and make it easier for lenders to assess your financial situation.
Prepare your financial documents
Commonly required documents include pay stubs, tax returns, bank statements, and investment account statements. Additionally, you may need to provide documentation for any significant debts or assets, such as car loans or rental properties.
Keep your documents organized
Organizing your documents can save time during the pre-approval process and help ensure you don’t miss any critical information. Create a system for storing and categorizing your financial documents, making it easier to locate and submit them when needed.
Tip #9: Be prepared to negotiate
Once you’ve received mortgage pre-approval offers, be prepared to negotiate with lenders to secure the best possible rates and terms. Working with a broker will save you the time ad effort and they negotiate on your behalf.
Compare offers
Review each pre-approval offer carefully, comparing interest rates, terms, and other features. This will give you a better understanding of the available options and help you identify the best deal for your situation.
Leverage your pre-approvals
Having multiple pre-approvals can provide you with more leverage when negotiating with lenders. Use your pre-approvals to your advantage by presenting them to other lenders and asking if they can match or beat the terms.
Tip #10: Stay in communication with your lender
Throughout the mortgage pre-approval process, it’s essential to maintain open communication with your chosen lender. This can help ensure a smooth process and allow you to address any potential issues before they become problems.
Update your lender on any changes
If your financial situation changes during the pre-approval process, such as a new job or additional debt, inform your lender immediately. This can help prevent any surprises or delays when it comes time to finalize your mortgage.
Ask questions
If you have any questions or concerns throughout the process, don’t hesitate to ask your lender for clarification. They are there to help you and should be able to provide the information you need to make informed decisions.
Frequently Asked Questions
What is the difference between pre-qualification and pre-approval?
Pre-qualification is an informal assessment by a lender, based on the information you provide, to give you an estimate of how much you might be eligible to borrow. It does not involve a thorough analysis of your credit report or financial situation. Pre-approval, on the other hand, is a more formal process where the lender thoroughly evaluates your credit report, income, and financial situation to provide a more accurate estimate of the mortgage amount you can qualify for, along with the interest rate. Pre-approval involves a written commitment from the lender and carries more weight than pre-qualification when negotiating with sellers.
Can I get pre-approved with a co-signer?
Yes, you can get pre-approved with a co-signer. A co-signer can help you qualify for a mortgage if your credit score, income, or financial situation is not strong enough on its own. By including a co-signer with a solid credit history and stable income, you can increase your chances of getting pre-approved, as the lender considers the combined financial strength of both applicants.
How long does the mortgage pre-approval process typically take?
The mortgage pre-approval process can take anywhere from a few hours to a few days, depending on the lender and the complexity of your financial situation. Online lenders may provide pre-approval decisions more quickly, while traditional banks may take longer to review and verify your information. It’s important to note that gathering all necessary documents and information beforehand can help speed up the process.
How long is a mortgage pre-approval valid?
Mortgage pre-approvals are typically valid for 60 to 120 days, depending on the lender. This time frame allows you to search for a property with the confidence that your financing is in place. However, it’s important to note that if your financial situation or credit score changes significantly during this period, your pre-approval may be affected or invalidated.
Can I still be denied a mortgage after receiving pre-approval?
Yes, you can still be denied a mortgage even after receiving pre-approval. Pre-approval is not a guarantee that you will ultimately be granted a mortgage. There are several reasons why you might be denied, including changes in your financial situation, credit score, or employment status since the time of pre-approval. Additionally, the property you choose may not meet the lender’s requirements, or the lender may re-evaluate your application based on updated underwriting guidelines. It’s essential to keep your financial situation stable and maintain communication with your lender throughout the home-buying process to minimize the risk of being denied a mortgage.
Sources
- Marquand, Barbara, and Beth Buczynski. “Understanding Debt-To-Income Ratio for a Mortgage.” NerdWallet, 27 May 2016, www.nerdwallet.com/article/mortgages/debt-income-ratio-mortgage. Accessed 8 May 2023.
- David, Jamie. “Guide to Mortgage Affordability.” Ratehub.ca, 16 July 2021, www.ratehub.ca/mortgage-affordability-calculator. Accessed 8 May 2023.
- “Pre-Qualified vs. Pre-Approved: What’s the Difference?” Investopedia, 2023, www.investopedia.com/articles/basics/07/prequalified-approved.asp. Accessed 8 May 2023.