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Mortgage Pre-Approval: A Complete Guide for Homebuyers
A mortgage pre-approval is one of the most important steps in the homebuying process. It helps you understand how much home you can afford, streamlines the buying process, and gives you a competitive edge when making an offer. Here's a breakdown of everything you need to know about mortgage pre-approvals.
What is a Mortgage Pre-Approval and Why It Matters?
A mortgage pre-approval is a lender's formal commitment to provide you with a loan for a specific amount, based on your financial situation. During pre-approval, lenders review your income, credit score, debts, and employment history to determine the maximum amount they are willing to lend you.
Why it matters:
Clarity: Pre-approval gives you a clear idea of your budget, preventing you from falling in love with homes you can't afford.
Negotiating Power: Sellers are more likely to take your offer seriously if you have a pre-approval letter in hand.
Faster Closing: With pre-approval, much of the paperwork is already processed, making the final approval and closing quicker.
The Impact of Credit Checks on Mortgage Pre-Approval
Lenders will perform a credit check as part of the pre-approval process to assess your creditworthiness. This is a crucial step because your credit score significantly impacts the terms of the mortgage, such as the interest rate you’ll receive.
Hard vs. Soft Inquiry: A hard inquiry occurs during pre-approval, which can have a slight impact on your credit score, but the effect is usually temporary.
Credit Score Importance: A higher score typically leads to better mortgage rates. A score of 680 or above is considered good, while scores below 600 may lead to higher interest rates or difficulty in getting approved.
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Required Documents for Pre-Approval: Salaried vs. Self-Employed Clients
Lenders will perform a credit check as part of the pre-approval process to assess your creditworthiness. This is a crucial step because your credit score significantly impacts the terms of the mortgage, such as the interest rate you’ll receive.
For Salaried Clients:
Proof of income (pay stubs, T4 slips)
Recent bank statements
Employment verification letter
Personal identification
For Self-Employed Clients:
Last two years of Notice of Assessments (NOA) from CRA
Proof of income (business tax returns, bank statements)
A year-to-date profit and loss statement
Personal identification
Being organized and having all required documents ready can expedite the pre-approval process.
Maximum Affordability Calculation Using GDS/TDS Ratios
Lenders use two key ratios to calculate how much mortgage you can afford:
Gross Debt Service (GDS) Ratio: This ratio measures the percentage of your gross income spent on housing costs (mortgage payments, property taxes, insurance, etc.). It should ideally not exceed 32% of your gross income.
Total Debt Service (TDS) Ratio: This ratio measures your total monthly debt obligations (including housing costs and other debts like car loans or credit cards). It should not exceed 40% of your gross income.
By using GDS and TDS ratios, lenders can determine your maximum affordability and ensure that your monthly mortgage payments won’t stretch your finances too thin.
How RateShop Brokers Simplify Pre-Approvals with Lenders like MCAP and CMLS
RateShop brokers make the mortgage pre-approval process seamless by working directly with reputable lenders like MCAP and CMLS. Here's how we help:
Access to Multiple Lenders: We have partnerships with a variety of lenders, allowing us to compare pre-approval offers and find the best options for you.
Expert Guidance: Our brokers provide personalized advice, ensuring you understand the terms, rates, and requirements of each offer.
Faster Processing: With our direct connections to lenders, we can expedite the pre-approval process, saving you time and reducing stress.
Common Mistakes That Delay Pre-Approvals
There are several mistakes homebuyers make that can delay the pre-approval process. Common errors include:
Incomplete Documentation: Missing or inaccurate documents can lead to delays.
Not Monitoring Credit: Unexpected changes in your credit score or unresolved debts can impact pre-approval.
Changing Jobs: A job change can create uncertainty for lenders, especially if you're self-employed or have unstable income.
Overextending Debt: Taking on additional debt before or during the pre-approval process can lower your affordability ratio.
Avoiding these mistakes can help you move through the pre-approval process smoothly.
How Pre-Approvals Secure Rates in Volatile Markets
In uncertain or volatile markets, mortgage rates can fluctuate significantly. A pre-approval locks in a rate for a specific period, typically 60 to 120 days. This helps protect you from rate increases during the house-hunting process.
Rate Hold: Even if interest rates rise after you’ve been pre-approved, you can still secure your original pre-approved rate.
Security: A pre-approval gives you peace of mind, knowing the rate you’ve been offered is protected, allowing you to focus on finding your dream home.
Pre-Approvals for New Immigrants and Non-Residents
New immigrants and non-residents may face additional challenges when applying for a mortgage in Canada, but pre-approval is still possible.
New Immigrants: Lenders typically look for proof of stable income, a Canadian credit history (or an alternative credit report from another country), and a larger down payment (usually 10-20%).
Non-Residents: Non-residents can apply for Canadian mortgages, but they may need to meet stricter requirements, such as higher down payments (20-35%) and providing proof of income in their home country.
RateShop brokers are experts in navigating these unique challenges and helping new immigrants and non-residents find the best mortgage options.
Start Your Mortgage Pre-Approval Today with RateShop
Ready to get started on your homeownership journey? Contact RateShop today to speak with one of our expert brokers and begin your mortgage pre-approval process. We'll help you understand your options and secure the best deal for your unique situation.
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RateShop Inc. is a Mortgage Brokerage offering lowest mortgage rates to Canadians. We are provincially licensed in the following provinces: Mortgage Brokerage Ontario FSRA #12733, British Columbia BCFSA #MB600776, Alberta RECA #00523056P, Saskatchewan FCAA #00511126, PEI #160622, New Brunswick FCNB #88426, Newfoundland/Labrador. Our Quebec Mortgage Transactions are serviced by Orbis Mortgage Group AMF# 181136.
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