Even though pre-approvals offer no guarantees when circumstances change, realtors prefer their clients to have one before they start the search for a new home. In Canada pre-approval follows a process of whereby the mortgage lender screens the client to determine his ability to make repayments against a mortgage.
The outcome is an estimate of the size of the mortgage for which the borrower will qualify, as well as the rate of interest for the initial term of the mortgage. The borrower will also receive an estimate of the monthly repayment.
The Factors Influencing the Pre-Approval
The lender will require several details about your employment. He will want to know whether you are employed full time or part time. If you are part time employed, how many hours per week you are guaranteed? Do tips or commission form part of your income? If your income includes these, you could face a few problems proving the amounts.
How long have you been working for the same employer and is your employment stable? If you have just started at a job and you are still on probation, your employment income may be excluded.
If you are self-employed you may find yourself jumping through hoops to convince the lender to give you the mortgage for which you should qualify. A reputable, licensed mortgage broker can help you to qualify for a bigger mortgage.
Your debt to service ratio is an important determinant of the size of the mortgage for which you will qualify. To improve this ratio, you should pay off as much of your credit card and personal loans debt as you can afford before you apply for a mortgage.
Other items that will affect the mortgage terms and conditions include
Spousal and maintenance support obligations or receipts
Co-signing of someone else’s loans
The estimated cost of the amenities taking account of the size of the property that you hope to buy
Child tax benefits – some lenders will include this in your income.
You must demonstrate your excellent credit history to the borrower. This means that you must have a record of payments against credit cards and loans stretching over a couple of years.
A good credit score is essential. If you are in A-lender territory you could get a mortgage that supports a gross debt ratio of 39% and total debt ratio of 44%.
Ironically if your profile puts you in B-lender territory you may qualify for a bigger mortgage as there are some alternative lenders who will allow you a 50% total debt service ratio.
Once upon a time if you had more than 50% home equity and some added assets borrowers didn’t worry too much about the debt service ratios. Those days are long gone. A 20% down payment is required if you wish to avoid the mortgage insurance required for high ratio mortgages.
If you are a non-resident or if you have recently immigrated into Canada, you may have to pay as much as 35% down payment.
Other Direct or Indirect Real Estate Holdings
Your ability to borrow may be heavily impaired if you are a co-signatory on any one else’s mortgage. You will have to disclose any information pertaining to any rental property that you may own.
How rental income and expenditure is treated will differ from lender to lender in the calculation of debt service ratios. This and the ownership of second properties such as holiday homes will affect to some extent the size of the mortgage for which you will qualify.
High Ratio or Conventional Mortgage
If you are unable to make a 20% down payment on your mortgage, yours is a high ratio mortgage and the lender will require default insurance. This, in effect, means that the insurer will make the final decision on whether you can borrow and how much.
Lenders often also obtain insurance on conventional mortgages. Typically, lenders cover the premiums themselves, so you probably wouldn’t even know about it. Even so, the insurer has the final say on whether you get the mortgage or not.
Terms and Conditions
If you have chosen a fixed interest rate the maximum amount for which you could qualify is calculated using the greater of the Bank of Canada Qualifying rate or 2% above your chosen mortgage contract rate.
If you’re going with a variable interest rate the maximum amount for which you will qualify will be based on the Bank of Canada qualifying rate. This means that you could qualify for a higher mortgage if you selected a variable interest rate.
The maximum amortization period is thirty years except where you have a high ratio and/or an insured mortgage in which case the maximum amortization period if 25 years. The longer the mortgage amortization period the higher the maximum amount.
Find the Best Terms and Conditions
Every one of the above factors affect the decisions pertaining to your mortgage application, and there may be more. Consulting a mortgage broker will help to ensure that you get the best terms and conditions. He will also help you to navigate through the pitfalls of financing a home and ensure that you get the product that best suits your lifestyle.
How Long Will the Pre-Approval Last?
Since a pre-approval is based on a specific set of circumstances at a particular time in your life it follows that should those circumstances change significantly following the pre-approval, the pre-approval may change along with the change in circumstances. Judging by the number of times that pre-approvals change it seems that many would-be home owners are not aware of this.
The Benefits of Pre-Approval
Although pre-approval does not offer you any guarantees, there are still several undeniable benefits to getting mortgage pre-approval.
It protects you against interest rates hikes for up to 120 days. You will not pay more than the rate that printed on your pre-approval. If the rates are lower at the time that the deal goes through you will still benefit from the lower rate.
You will have greater leverage when it comes to negotiating the conditions of purchase with the seller as he/she will know that you have the funds available and you are not wasting his/her time.
Pre-approval means that you go out into the realty markets in full knowledge of the amount that you can spend on the house of your dreams. This saves time and effort, as you can restrict your search to the properties that fit within the budget.
Contact your mortgage broker to assist with pre-approval.