The Dos and Don’ts of Getting a Mortgage Pre-Approval

Jordann Brown
by Jordann Brown July 25, 2016 / No Comments

Becoming a homeowner is a life-long dream for many Canadians but as with all new experiences, there’ll be uncertainty and you may even second guess yourself once or twice. You’ll be interviewing realtors, looking at homes, worrying about bidding wars, and let’s not forget the big one: Qualifying for a mortgage.

To help you on your home hunting journey, here are the dos and don’ts of the first step of the buying process: The mortgage pre-approval.

What to do

Apply for a pre-approval first—Most Canadians think the first step in the home-buying process is to contact a realtor and start looking at homes. This isn’t correct. The first thing you should do is apply for mortgage pre-approval. After all, if you find a home you like, you’ll want to move quickly and being pre-approved for a mortgage removes an extra step in the process.

Shop around—Just as you’d view several homes before settling on “the one,” you should shop around for the best mortgage rate. Don’t just go to your local bank branch and expect to receive the best mortgage rate. Do your research and compare mortgage rates or use a mortgage broker who will negotiate on your behalf. Even half a percentage point can make a huge difference in your regular payments and the amount of interest you’ll pay over time.

Assemble your documentation—Collecting all of the documentation required for a mortgage approval can take time so it’s best to get started right away. Ask your mortgage broker for a list of required documentation to finalize your mortgage and begin gathering it all in one place.

Here’s a preliminary list: Identification; bank account and investment statements to prove your ability to pay the down payment and closing costs; proof of any assets like a car, cottage or boat; proof of income (pay stubs and letter from your employer, or a notice of assessment if you are self-employed); number of years with current employer; and information about debt including student loans, car loans, and lines of credit.

Stay in touch—Stay reachable in case your mortgage broker has any questions about your documentation. This means avoiding vacations or business trips where you won’t have access to email or your phone. If you aren’t available, they may draw conclusions and reject your mortgage pre-approval. If you absolutely must leave town, make sure to inform your mortgage broker in advance.

Read the fine print—Once you’ve been pre-approved, your loan officer will send your pre-approval document. This document will outline the interest rate you’ll receive, the loan terms, and the mortgage amount you’ve been pre-approved for. It may seem like financial jargon, and it’s important to read the fine print on every page carefully.

What not to do

Don’t get pre-approved for more than you budgeted—When I recently sought pre-approval for a mortgage, it was because I was looking at one specific home that was well below my budget. I requested to be pre-approved for the mortgage amount I’d need: $250,000. To my surprise, my mortgage broker told me they’d upped the amount to $300,000 and that there was “lots of wiggle room above that.”

Even though I’d requested a smaller pre-approval amount, I was pre-approved for much more. This worked out well for me because my ultimate budget is $300,000, but you should beware that the mortgage you are pre-approved for may not jive with what you can actually afford.

Don’t make the upper ceiling of your mortgage pre-approval your maximum purchase price. Do your own calculations, figure out how much you can afford monthly (don’t forget the other costs associated with home ownership, not just the mortgage) and go from there.

Don’t make major purchases—Once you’ve submitted your documentation to your loan officer, your financial situation shouldn’t change from pre-approval to loan finalization. You don’t want to change your financial situation because that could ultimately result in loan rejection, even if you were initially pre-approved. To avoid rejection, don’t make any major purchases that change your debt service ratios.

Don’t apply for new credit—You also shouldn’t apply for new forms of credit like a line or credit or credit card, and don’t co-sign a loan for a friend or family member. Otherwise, you may no longer qualify for a mortgage.

Don’t quit or change jobs—Finally, don’t change jobs! A key to your mortgage approval is a steady and predictable income. Changing jobs or quitting your job to become self-employed will definitely throw a wrench into your mortgage approval process. Instead, put off changing employers or becoming an entrepreneur until after you have the keys to your new place.

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