What is Mortgage Pre-Approval?
Mortgage pre-approval is the process of determining how much a lender is willing to lend you to purchase a home. It provides a clear understanding of your budget, demonstrates your seriousness to sellers, and locks in an interest rate for a specified period (usually 90–120 days). Please contact me for a list of savvy Mortgage Brokers.
Why is Mortgage Pre-Approval Important?
Clarity on Budget: Ensures you shop for homes within your price range.
Strengthens Offers: Sellers view pre-approved buyers as more reliable, giving you an edge in competitive markets.
Locks in Interest Rates: Protects you from rate increases during the pre-approval period.
The Mortgage Pre-Approval Process
Step 1: Gather Required Documents
Lenders require proof of your financial health. Typical documents include:
Income Verification: Recent pay stubs, T4 slips, tax returns, or letters of employment.
Proof of Assets: Bank statements, investment portfolios, and savings.
Debt Information: Details of existing loans, credit cards, or other financial obligations.
Credit Score: Lenders will perform a credit check to assess your reliability as a borrower.
Step 2: Understand What Lenders Look For
Income Stability: Consistent and verifiable income to ensure repayment capability.
Credit Score: A score above 680 is ideal for competitive rates, though lower scores may still qualify for insured mortgages.
Debt-to-Income Ratio: Your total debt payments (including the future mortgage) should not exceed 44% of your gross monthly income.
Down Payment:
Minimum Down Payment Rules in Canada:
Homes under $500,000: Minimum 5%.
Homes $500,000–$999,999: 5% for the first $500,000 and 10% for the remainder.
Homes $1,000,000 and above: 20%.
Step 3: Shop Around for Lenders
Traditional Banks: Offer competitive rates and trusted service.
Credit Unions: Often provide flexible terms and personalized service.
Mortgage Brokers: Compare rates from multiple lenders to find the best option.
Online Lenders: Convenient and may offer lower fees.
Step 4: Submit Your Application
Provide the required documents to your chosen lender or mortgage broker. They will:
Assess your financial information.
Perform a credit check.
Provide a pre-approval letter stating the maximum loan amount and interest rate.
Common Challenges in Mortgage Pre-Approval
Low Credit Score: Work on improving your credit by paying down debts and making timely payments.
High Debt Levels: Reduce your debt-to-income ratio by paying off smaller debts before applying.
Insufficient Down Payment: Save more using government programs like the RRSP Home Buyers' Plan (HBP) or the Tax-Free First Home Savings Account (FHSA).
Tips for a Smooth Pre-Approval Process
Avoid New Debt: Don’t take out new loans or credit cards while seeking pre-approval.
Be Honest: Provide accurate information to prevent delays or denials.
Maintain Job Stability: Avoid changing jobs during the process, as lenders value consistent employment.
Ask Questions: Understand the terms, such as prepayment penalties, mortgage type (fixed or variable), and portability.
Next Steps After Pre-Approval
Shop for Homes: Stick to the budget outlined in your pre-approval.
Stay in Touch with Your Lender: Inform them of any significant financial changes.
Act Quickly: Calgary's real estate market can be competitive, so having pre-approval enables you to make offers confidently.
Mortgage pre-approval is a critical first step for any homebuyer in Calgary. By understanding the process and preparing accordingly, you can secure favorable terms and move forward confidently in your home-buying journey.
