It’s important to go through the mortgage pre-approval process before you start looking for a home. You’ll find out valuable information, including:
- The maximum mortgage amount you can afford
- What your monthly mortgage payment would be
- The current mortgage rates available on the market
Getting pre-approved for a mortgage guarantees the rate you’re offered by your lender for up to 160 days. You’re protected from increases in interest rates while searching for a home if you lock in with that lender. Even if rates go down during this time, your lender will honour the lower rate, so it’s a win-win situation. Applying for pre-approval is free and recommended.
There are three main topics a lender will discuss with you when applying for a mortgage pre-approval:
1. Down Payment
It’s important you’ve saved a lump sum of money to put toward the purchase of your home. The minimum down payment in Canada is 5% of the total purchase price for homes under $500,000. And if your home is over $1 million, your minimum down payment is 20% on the entire amount.
As of February 15, 2016, the minimum down payment for homes between $500,000 and $1 million is 5% on the first $500,000, and 10% on the remaining amount.
First $500,000 x 5% down payment = $25,000
Remaining $200,000 x 10% down payment = $20,000
Total down payment: $25,000 + $20,000 = $45,000
Your down payment directly affects the size of your mortgage.
Let’s say you have a down payment of $20,000 and you want a home under $500,000, meaning your minimum down payment is 5%.
$20,000 (as 5% of the total home price) x 20= $400,000
Your maximum mortgage is $400,000.Zoo Tip!
Keep in mind there are also closing costs you’ll be responsible for when buying a home, which can be upwards of 4% of the selling price. So, if you have a down payment of exactly 5% of your mortgage, you’ll need to make sure you have extra savings put aside for your closing costs.
Long story short: Your pre-approval amount is how much your lender is willing to lend you, not how much you should spend. The smaller your mortgage, the more you’ll have for savings and other costs.
2. Credit Score
Your credit score gives lenders an indication of your financial health. Depending on your credit score, lenders assess the level of risk, giving you different options:
- From 680 to 900: You qualify for a mortgage with an “A” level lender. This includes top brokerages and major banks.
- From 600 to 680: Lenders will weigh other financial factors to determine your eligibility. Depending on your assessment, you may qualify for an “A” level lender or a “B” level lender, like Home Trust or Equitable Bank.
- Below 600: You won’t get the best rates and only qualify to work with a “B” level lender.
3. Debt Service Ratios
Your Gross Debt Service Ratio and Total Debt Service Ratio are two measurements used to determine your largest affordable monthly mortgage payment. These ratios are based on your income, debt, and expenses, and give lenders an idea of your financial situation. Check out our page on mortgage affordability to learn more about debt service ratios.
Supporting documentation you’ll need
Although it varies between lenders, you should be prepared to have the following information ready:
- ID (Driver’s License, Passport)
- Employer letter as proof of income and length of time with employer
- Financial statements as proof of ability to pay down payment and closing costs
- Proof of other assets like cars, properties, and boats
- Credit card statements
- Loan statements for student loans, personal loans, and car leases
- Proof of spousal and child support payments
Limitations on mortgage pre-approvals
Being pre-approved for a mortgage doesn’t mean your final mortgage application will be approved. If your property doesn’t match a lender’s qualification criteria you won’t qualify for that mortgage, despite being pre-approved.
There are a few reasons lenders could deem the property unsuitable:
- The home is a heritage home
- The appraised value is below the purchase price
- The home has asbestos or knob & tube wiring