Buying a new home in St. John's, NL? Exciting! Buying a new home is exciting, but it can feel overwhelming if it’s your first time going through the process. Before you can find your new dream home, you are going to need to be pre-approved for a mortgage.
What is Mortgage Pre-Approval?
Mortgage pre-approval is defined as an initial evaluation of a borrower (that’s you), by a lender (the group or financial institution that is giving you the loan) to decide whether they can give you a pre-qualification offer.
What’s the point of Mortgage Pre-Approval?
A mortgage pre-approval will allow a mortgage lender to figure out how much money they will lend you and what interest rate they will charge you. To do this, the lender will look at your assets (what you own), how much money you make, and how much debt you have (credit cards, student loans, car loans/ leases, etc.). Mortgage pre-approval will show you:
- How large a mortgage you can potentially get (this is not a guarantee just a guideline)
- How to estimate what your mortgage payment will be
- Lock in an interest rate (generally for between 60 and 120 days depending on the lender)
When you’re ready to put an offer down on a house your real estate agent, and the seller will want to see a pre-approval letter to show the likelihood that you will be able to close the deal.
What Do I Need to Show My Lender for Pre-Approval?
A potential lender will look at many things when deciding whether to pre-approve you. You will need to provide your lender with:
- Proof of employment
- Proof that you can afford a down payment and the closing costs of your new home
- Information about other assets you own.
- Information about your debts and other financial obligations.
What Are the Steps for Mortgage Pre-Approval?
Mortgage Pre-Approval sounds intimidating, but it’s actually an easy process. You have to make sure to provide the correct information and the supporting documents they need; the rest is up to them. To break it down for you, here is a list of the steps you’ll need to take to make sure all your information is correct and to secure the necessary documents.
Step 1: Check Your Credit Score
Although your lender will pull your credit information themselves, it’s a good idea to get a copy of your credit reports and credit scores on your own, so you can check for any problems or mistakes, and take care of them before you start the process. In Canada, you can get credit reports from both Equifax Canada and TransUnion Canada, and you can do it by mail, phone, or online.
Step 2: Gather Your Personal Documentation
You will need to bring the following with you to show your lender:
- An official identification– A passport or driver’s license is acceptable proof.
- Proof of Employment– Most lenders will accept a current pay stub and a letter from your employer as proof. If you are self-employed, you will need Notices of Assessment from the Canada Revenue Agency for the past two years for your proof.
- Proof you can pay the down payment– You will need copies of current financial statements, including bank account statements and investments you have. You do not need to bring your credit information as the lender will pull it themselves.
Step 3: Wait for Approval
Depending on the lender’s pre-approval process and the underwriters, the whole process will take two weeks to a month. Some lenders use automated underwriters, which speeds up the process to a few days or even a few hours.
What is the difference between pre-approval and pre-qualification?
Pre-qualification is when a lender gives you an estimate of how much money you could potentially borrow based on the information you provide about your finances. This is not a guarantee that you will actually get the loan. Pre-approval is when the lender has verified all the information you have provided and they are willing to give you a loan up to a certain amount. This is much more binding than pre-qualification.
What do I need to get pre-approved for a mortgage?
Pre-approval requirements may vary from lender to lender, so it’s important to shop around and compare offers before you decide on a mortgage. When you’re ready to put an offer down on a house your real estate agent, and the seller will want to see a pre-approval letter to show the likelihood that you will be able to close the deal. A pre-approval letter is not the same as a mortgage commitment or loan approval. A pre-approval letter does not guarantee that you will get a mortgage from the lender who wrote it. It’s just an estimate of how much they would be willing to lend you based on the information you provided. To get a pre-approval letter, you will need to provide the lender with your financial information. This includes things like your income, employment history, debts, and assets. The lender will use this information to determine how much money they are willing to lend you. Once you have a pre-approval letter, you can start looking for a house that you can afford. When you find a house you want to make an offer on, the seller will want to see your pre-approval letter to show that you are likely to be able to close the deal. Getting pre-approved for a mortgage is a good way to show sellers that you’re serious about buying a home.
Information Commonly Requested By Lenders:
Lenders will want to see your employment history and income. This may include W-2 forms, tax returns, and/or pay stubs. Your income plays a pivotal role in determining how much you can borrow.
Lenders will also want to know what kind of debt you have and your monthly payments. This includes credit cards, student loans, car loans/leases, etc. The lender will use this information to calculate your debt-to-income ratio (DTI), which is a key factor in determining how much money they will lend you.
Assets are anything that you own that has value. This may include your savings, investments, and/or real estate. This is important to a lender because it shows them that you have the ability to liquidate your assets to make a down payment and/or pay off your mortgage if need be.
Your credit score:
Your credit score is a number that represents your creditworthiness. It is used by lenders to determine whether or not you are a good candidate for a loan. A high credit score means you have a good credit history and are more likely to repay your debts. A low credit score means you have a bad credit history and are more likely to default on your loan.
Your employment history:
Another important factor that lenders will look at is your employment history. They want to see that you have a steady job and income. If you’ve been employed for a short period of time, or if you’ve had multiple jobs, it may be more difficult to get pre-approved.
Your down payment:
The size of your down payment will also be taken into consideration by the lender. A larger down payment means less risk for the lender and may increase your chances of getting pre-approved.
Your payment history is a record of how you’ve repaid your debts in the past. This includes things like whether or not you’ve made your payments on time, missed any payments, or had any collections or bankruptcies. The lender will use all of this information to determine whether or not you are eligible for a loan and how much money they are willing to lend you.
If you have any major derogatory items on your credit report, it may be more difficult to get pre-approved. These items include bankruptcies, foreclosures, and repossessions.
Mortgage pre-approval mistakes (the don’ts)
Don’t apply for new credit
Applying for new credit may sound like a good idea if you’re trying to improve your credit score. However, it can actually have the opposite effect in the short term. When you apply for new credit, the lender will do a hard inquiry on your credit report. This can temporarily lower your credit score and may make it more difficult to get pre-approved for a mortgage.
Do not make any large purchases
Making large purchases, such as a new car or boat, can also have a negative effect on your mortgage pre-approval. When you make a large purchase, it increases your debt-to-income ratio (DTI). This is the amount of debt you have divided by your income. A higher DTI means you have less money available to make your mortgage payments and may make it more difficult to get pre-approved. This leads us to the next “don’t”.
Don’t do anything that would change your DTI ratio
Your DTI is a key factor that lenders look at when determining whether or not you are eligible for a loan. If anything changes your DTI, it could make it more difficult to get pre-approved. For example, if you apply for a new credit card and make a large purchase, your DTI will increase. This may make it more difficult to get pre-approved for a mortgage. Another example is if you get a promotion or raise at work. This will increase your income and lower your DTI. This may make it easier to get pre-approved for a loan. You can use this DTI calculator to figure out your current DTI.
Don’t change jobs or the way you are paid
If you change jobs or the way you are paid, it could have an effect on your mortgage pre-approval. For example, if you switch from a salaried position to commission-based pay, it may be more difficult to get pre-approved. This is because your income will now be variable and may not meet the lender’s requirements. If you are self-employed, it may also be more difficult to get pre-approved. This is because the lender will want to see tax returns and other financial documents to verify your income.
Do not open new lines of credit
Opening new lines of credit can also have a negative effect on your mortgage pre-approval. When you open a new line of credit, it increases your credit utilization ratio. This is the amount of credit you are using divided by the amount of credit you have available. A high credit utilization ratio can lower your credit score and make it more difficult to get pre-approved for a mortgage.
Do not close any lines of credit
Closing an existing line of credit may seem like a good idea if you’re trying to improve your credit score. However, it can actually have a negative effect. When you close a line of credit, it lowers your available credit and increases your credit utilization ratio. This can lead to a lower credit score and make it more difficult to get pre-approved for a mortgage.
Do not move money around
If you move money around in your bank account, it could have an effect on your mortgage pre-approval. For example, if you transfer money from your savings account to your checking account, it may look like you have less money saved for a down payment. This could make it more difficult to get pre-approved. Another example is if you withdraw money from your retirement account. This may make it more difficult to get pre-approved because the lender will want to see proof that you have the funds available.
Don’t co-sign for anyone
Co-signing for someone, such as a friend or family member, can also have a negative effect on your mortgage pre-approval. When you co-sign for someone, you are responsible for the debt if they default on the loan. This can increase your DTI ratio and make it more difficult to get pre-approved for a mortgage. It’s also important to note that co-signing is a big responsibility. If you co-sign for someone and they default on the loan, it will damage your credit score. This can make it more difficult to get approved for a loan in the future.
Do not make any late payments
Making a late payment on any of your bills can have a negative effect on your credit score. This can make it more difficult to get pre-approved for a mortgage. It’s important to make all of your payments on time, every time. This includes your rent, utilities, car payments, student loans, and credit cards.
Do not leave gaps in your employment history
If you have gaps in your employment history, it may make it more difficult to get pre-approved for a mortgage. When you apply for a mortgage, the lender will want to see proof of income. They will also want to see a steady employment history. If you have gaps in your employment history, it may be more difficult to provide this documentation.
5 mortgage pre-approval tips (the dos)
Now that you know what not to do, here are a few things you can do to improve your chances of getting pre-approved for a mortgage
Check your credit report
The first step is to check your credit report. You’re entitled to one free credit report from each of the major credit bureaus every year. It’s important to check your credit report for errors. If you find any, dispute them with the credit bureau.
Pay down your debt
Paying down your debt is a good way to improve your chances of getting pre-approved for a mortgage. When you have less debt, it decreases your DTI ratio. This makes it more likely that you’ll be able to get pre-approved for a mortgage.
Save for a down payment
Saving for a down payment is another important step in getting pre-approved for a mortgage. The more money you have saved, the less money you’ll need to borrow. This can increase your chances of getting pre-approved.
Get a cosigner
If you have trouble getting pre-approved for a mortgage on your own, you may want to consider getting a cosigner. A cosigner is someone who agrees to sign the loan with you. This means they are responsible for the debt if you default on the loan. Having a cosigner can increase your chances of getting pre-approved for a mortgage.
Apply with multiple lenders
Applying with multiple lenders is a good way to improve your chances of getting pre-approved for a mortgage. Each lender has their own requirements and standards. By applying with multiple lenders, you’re more likely to find one that will approve you for a loan. Applying for a mortgage pre-approval is a good first step in the home-buying process. By following these tips, you can improve your chances of getting pre-approved for a mortgage.
Read the fine print
Once you’ve been pre-approved for a mortgage, it’s important to read the fine print. There may be some conditions that you need to meet in order to get the loan. For example, the lender may require you to have a certain amount of money saved for a down payment. It’s important to understand all the terms and conditions of the loan before you agree to it.
Are you looking for a local mortgage broker?
Get an easy pre-approval in St. John's at the best rate with McKay Wood. Mortgage pre-approval in St. John's, YT doesn’t have to be difficult. McKay Wood can help you get pre-approved quickly and easily. We work with you one-on-one to ensure that you get the best mortgage for your needs. Contact us today for more information.
Why are we better for you than your bank?
- We’re a local company that has been helping St. John's locals with their mortgages for over 10 years.
- As your mortgage broker, we work for you, not the bank. This means that we’ll get you the best mortgage rate possible.
- We have a wide range of lenders that we work with, so we can find the perfect match for you.
- We’re available to answer your questions and help you through the process, from start to finish.
Get in touch with McKay Wood today and let us help you get pre-approved for a mortgage. We’ll make the process easy and stress-free. Contact us now!
An expert St. John's mortgage broker in your corner now and in the future
As your St. John's mortgage broker, McKay Wood is always here to help you with any questions or concerns you may have. We’ll be there for you every step of the way, from pre-approval to closing. And we’ll continue to be a resource for you even after you’ve closed on your home.
Get Help With A Mortgage Pre-Approval Today
If you’re looking for help with a mortgage pre-approval in St. John's, McKay Wood is here to help.
- Contact McKay Wood through our contact form.
- Schedule a meeting with Mckay.
- Get help with Pre-approval!