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Pre-Approval

The pre-approval process

A pre-approval is when a potential mortgage lender looks at your finances to find out the maximum amount they will lend you and what interest rate they will charge you.

With a pre-approval, you can:

know the maximum amount of a mortgage you could qualify for estimate your mortgage payments lock in an interest rate for 60 to 120 days, depending on the lender

The pre-approval amount is the maximum you may get. It does not guarantee that you'll get a mortgage loan for that amount. The approved mortgage amount will depend on the value of your home and the amount of your down payment. It may be a good idea to also look at properties in a lower price range so that you don’t stretch your budget to its limit.

Remember that you’ll also need money for:
 Closing costs
 Moving costs
 Ongoing maintenance costs

Check your credit report
Before you start shopping around for a mortgage, order a copy of your credit report. Make sure it does not contain any errors. A potential lender will look at your credit report before approving you for a mortgage.

If you don’t have a good credit score, the mortgage lender may:
    Refuse to approve your mortgage
    Decide to approve it for a lower amount or at a higher interest rate
    Only consider your application if you have a large down payment
    Require that someone co-sign with you on the mortgage

Learn how to order your credit report ! Visit Equifax  https://www.consumer.equifax.ca/personal/  or TransUnion https://www.transunion.ca/  for your free Credit Report

Before pre-approving you, a lender will look at your current assets (what you own), your income and your current level of debt.

You’ll need to provide mortgage broker with the following:

    Identification
    Proof of employment
    Proof you can pay for the down payment and closing costs
    Information about your other assets, such as a car, cottage or boat
    Information about your debts or financial obligations

For proof of employment, your lender or mortgage broker may ask you to provide:

    proof of current salary or hourly pay rate (for example, a current pay stub and a letter from your employer)
    your position and length of time with the organization
    Notices of Assessment from the Canada Revenue Agency for the past two years, if you're self-employed

For proof you can pay the down payment, your lender or mortgage broker may ask you to provide recent financial statements from bank accounts or investments.

Your debts or financial obligations may include:
    Credit card balances and limits, including those on store credit cards
    Child or spousal support amounts
    Car loans or leases
    Lines of credit
    Student loans
    Other loans

When getting pre-approved, ask your broker or lender the following:
    How long they guarantee the pre-approved rate
    Will you automatically get the lowest rate if interest rates go down while you're pre-approved
    If the pre-approval can be extended

Qualify for a mortgage

To qualify for a mortgage, you’ll have to prove to your lender that you can afford the amount you're asking for.

Mortgage lenders or brokers will use your financial information to calculate your total monthly housing costs and total debt load to determine what you can afford.

Lenders will consider information such as:

    Your income (before taxes)
    Your expenses (including utilities and living costs)
    The amount you’re borrowing
    Your debts
    Your credit report and score
    The amortization period

Total monthly housing costs

Your total monthly housing costs shouldn’t be more than 32% of your gross household income. This percentage is also known as the gross debt service (GDS) ratio.

These housing-related costs include:

    Mortgage payments
    Property taxes
    Heating
    50% of condo fees (if applicable)

Total debt load

Your total debt load shouldn’t be more than 40% of your gross income. This includes your total monthly housing costs plus all of your other debts. This percentage is also known as the total debt service ratio.

Qualifying interest rates for mortgages

To qualify for a mortgage loan, you will need to pass a “stress test”. You will need to prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your mortgage contract.

    The Bank of Canada’s conventional five-year mortgage rate
    The interest rate you negotiate with your lender plus 2%

For example, say you apply for a mortgage at a bank and that you have a down payment of 5% of the value of the home. You’ll need to get mortgage loan insurance since your down payment is less than 20%.

Assume that:

    ​the interest rate you negotiate with your lender is 3.00%
    ​the Bank of Canada’s conventional five-year mortgage rate is 5.14%

You'd need to qualify at the higher of the two interest rates, which is the Bank of Canada’s conventional five-year mortgage rate, even if you'll be paying the lower interest rate in your mortgage contract.
Calculate your gross debt service and total debt service ratios

Use the Mortgage Qualifier Tool​ to see if you can qualify for a mortgage based on your income and expenses.

The maximum amount you calculate may actually overestimate what you can really afford. Also think about the extra costs associated with buying a property, such as closing costs, mortgage loan insurance premiums, moving costs, unexpected expenses, maintenance costs and major home repairs.

Compare the result with the estimated costs for the home you'd like to buy. If the total costs you estimate are lower than the maximum amount you calculated, you’ll probably qualify for a mortgage with the lender.