You’re looking to get approved for a mortgage, but it seems like a daunting process: there’s paperwork to be collected and submissions to be made, not to mention the sense of vulnerability that comes along with disclosing your financial situation. Understanding the mortgage approvals process can help put your mind at ease. What do lenders look for? How do pre-approvals work? Let’s break it down and get you one step closer to your move-in date.
Four Things Lenders Look For
Before granting you a loan, lenders will want information on four general aspects of your situation.
Income and Employment: Lenders are required to verify that you will have the capability to repay your mortgage. Examining your income and employment situation helps them to determine the amount of loan you can be reasonably expected to handle. To demonstrate this, you’ll need proof of employment in the form of a letter of employment or pay stub.
For those who are self-employed or who receive portions of their income in variable structures (such as bonuses or commission), T4 slips for the previous two years may be required.
Debt and Credit: Now is the time to thank yourself for being a responsible manager of debt, or to start making up for past mistakes.
As we noted in a recent article, your credit score is an important, but manageable, piece of your financial picture. The extent to which you currently carry debt through credit cards, lines of credit, or other financial obligations will affect your ability to qualify for loans, as will your past financial behaviour.
Down Payment: If you’ve saved a sizable amount of money for your down payment, this will certainly be looked at favourably. It’s important to note that you may be required to demonstrate where this money came from. If large sums of money have recently been moved around, the process may become cumbersome, but those with a good explanation (i.e. not money laundering) will ultimately be successful.
The Property You Plan to Purchase: Before financing your purchase, lenders will look to ensure that your investment is a good one. In British Columbia, property documentation will be necessary, including Strata Form B for condo purchases.
An independent appraiser may be necessary in some situations, while in others an internal valuation completed by the lender may suffice.
Three Advantages of Pre-Approvals
A pre-approval is a promise from a lender to give you a certain amount of money. While anyone is free to shop for homes, those who have been granted pre-approval enjoy three advantages.
Confidence: Why waste your time shopping for homes you don’t qualify to purchase? By getting pre-approved, you can explore your options with confidence.
Negotiating Leverage: Being pre-approved makes you a stronger candidate than another potential buyer who has not yet taken that step. This may provide you with a certain amount of negotiating leverage in some situations.
Budgeting Ability: Your pre-approval will include a 120 day interest rate hold. If rates shoot up during that period, you can continue to shop and budget with the knowledge that your rate will not exceed the agreed upon ceiling.
Three Kinds of Pre-Approvals
All pre-approvals are not created equally. In fact, some are not pre-approvals at all. Let’s grade the various types of ‘pre-approvals’ you may be offered.
OK: In some cases you’ll have a conversation with a lender who will ask you some questions, punch some digits into their handy dandy calculator, and spit a number back at you. If that seems a bit too good to be true, it is, because nothing binding has occurred. The term pre-approval is a misnomer here, because all you’ve actually been given a pre-qualification.
Better: You’ve given a mortgage professional information about your income and debts, and they’ve also pulled your credit reports. This allows them to lock in your mortgage rate for 120 days, but since no documentation has changed hands, nothing is for certain.
Best: At Pinsky Mortgages we prefer to help you get your ducks in a row right from the start. This means gathering the appropriate documentation in order to obtain a clear picture and avoid future surprises.
Some mortgage professionals choose to kick this can down the line. After all, it’s a bit more work for them and for you. Unfortunately, this lack of up-front diligence leaves you vulnerable to future headaches and disappointments. Besides, you’re going to have to take this step eventually.
Our job is to present you to lenders in the best possible light, while providing you with quality and attentive guidance throughout the process.
Buying a home is an incredible journey. By helping our clients understand and complete the steps involved, the Pinsky team continues to earn our reputation for customer service.
I want quality, professional guidance that can help me get approved for a mortgage!