Getting pre-approved for a mortgage before you even begin looking at real estate offers reassurance that you understand what you can afford to spend and that a lender is willing to back your purchase based on the information you provided to your mortgage agent, who then secured the pre-approval.
A pre-approval is a conditional commitment issued by a financial institution to lend you a specific amount of money at a certain interest rate based on your qualifications. The pre-approval process is quite straightforward, but having your financial information readily available will definitely speed things along.
How does a mortgage pre-approval work?
While the amount for which you’re pre-approved is the maximum you’ll receive, it’s not a guarantee that you’ll end up with a mortgage loan in that amount. The final mortgage approval will depend primarily on the value of your home and the amount of your down payment.
As well, the mortgage rate you’re offered during the pre-approval period is only guaranteed for a set timeframe – typically 90-120 days. And if any of your important information (see details below) changes before your mortgage is approved and closed, this could negatively impact your chances of receiving a mortgage at all. In other words, it matters what you do between the time of pre-approval and when you’re actually approved for a mortgage on a specific property. Don’t take on any more debt or change jobs.
Following is some key information your mortgage agent will ask you to provide in order to become pre-approved for a mortgage:
- Identification. Government-issued ID such as a driver’s license or passport displaying your name, address and date of birth. Identity theft is a major issue that occurs far too often, so verifying your identity is the first step.
- Employment verification. Letter from your employer indicating your position and the length of time you’ve been employed. And if you’re self-employed, you’ll be asked for your Notice of Assessment for the last two years. You may also be required to provide additional details such as the nature of your business, balance sheets, statement of business activity and references. You must demonstrate that you have stable employment, which enables you to make your mortgage payments on time.
- Proof of income. Steady income for at least two years. You may be required to provide income tax statements and/or paystubs. If you’re self-employed, expect to provide tax returns or other proof that shows history of sufficient income to make your mortgage payments. Also helpful to include proof of additional income sources such as a salary from a second job, commissions, bonuses or investment interest.
- Proof of assets. This include such things as: money in your bank accounts; investments; properties; vehicles; and other valuables such as jewelry and artwork.
- Credit score. Your creditworthiness plays an important role in a lender’s decision to approve or deny your mortgage application. Your credit score is based on your credit history, which is a record of your debts and the ability to repay them. This information is contained on your credit report, which outlines any open accounts, repayment history, total debt levels and any bankruptcy or collection issues. Maintaining a healthy credit history will provide credibility and, therefore, influence your ability to obtain a loan. Most traditional lenders require a credit score of at least 680.
There are often other documents you need to provide, but the ones listed above will give you the best idea of what to expect during the pre-approval process.
Have questions about how to get pre-approved for a mortgage in Ontario or regarding your mortgage in general? Answers are a call or email away.
Lic# M15002076 / 12340