Applying for a mortgage loan can be stressful for many potential homeowners. Many people fear the thought of rejection and not being able to secure their dream house. However, understanding the mortgage pre-approval process can help eliminate some of this worry.
Insurdinary offers many resources for homebuyers. You can use our affordability calculator to see what types of homes you can afford. Or, you can calculate your closing costs for the properties you want to buy by using our mortgage payment calculator.
Below, we will explain the ins and outs of mortgage pre-approval, including how to get approval for a loan, what questions to ask your broker, and what to do if a lender rejects your application.
What Is a Mortgage Pre-Approval?
A mortgage pre-approval is a process that lenders use to assess whether you are eligible for a home loan. During the process, the mortgage lender provides you with an in-principle commitment after your credit score, employment history, income, and other financial factors are considered. A pre-approval letter from a lender estimates how much you can borrow and the interest rate you can expect to pay on your loan.
Mortgage pre-approval is not the same as getting a mortgage commitment or loan approval. Once pre-approved for a mortgage, the lender tentatively approves you for a loan up to a certain amount.
Lenders use the information in your application to make a calculated decision. But do not consider yourself approved until you have a signed purchase agreement and meet all conditions of the sale.
Getting pre-approval for a mortgage loan is the first step in the home buying process. You must know how much you can afford before shopping for homes.
With a mortgage pre-approval, you can narrow your list of potential homes. Plus, you will be in a stronger negotiating position with sellers when you find the right home.
A mortgage pre-approval will hold the quoted rate for 120-160 days. This means that if there is a fluctuation in mortgage rates, you are protected provided that all of the factors such as credit rating and income are still consistent with what was provided at the time of the pre-approval application.
The process of mortgage pre-approval could potentially be a series of steps. Depending on the lender, you may also hear it described as mortgage prequalification or mortgage preauthorization. Certain lenders may have different criteria for each step in the pre-approval process.
How to Get Pre-Approved for a Mortgage
You can get pre-approved for a mortgage by either working with a mortgage lender or a mortgage broker during the mortgage pre-approval process. While both can help you, there are many differences between a lender and a broker.
Through a Mortgage Lender
There are many benefits to working with a mortgage lender for loan pre-approval. They have the experience and knowledge to help you choose the right loan product for your needs. Lenders can also help you understand the qualification process and what you need to do to get approval.
Another benefit of working with a mortgage lender is that they can guide you regarding how much you can afford to borrow. This information is vital to know as you begin the home buying process. With a lender’s help, you can develop a budget and plan accordingly.
Mortgage lenders can assist you if you encounter any challenges during the pre-approval process. They provide support and resources to help you overcome any obstacles.
Through a Mortgage Broker
A mortgage broker does not offer you a loan directly. Instead, they connect you to mortgage companies that can help you secure a mortgage loan.
Mortgage brokers work with many mortgage providers, including banks, credit unions, and private lenders. Therefore, they can shop around for the best rates and terms for your mortgage.
Mortgage brokers know the ins and outs of the home loan process. With in-depth knowledge of home financing, brokers can help you navigate the often-complex world of mortgages.
When you work with a mortgage broker, you receive personalized service throughout the pre-approval process. Your broker will get to know you and your situation and work with you to find the best mortgage possible.
Using an online mortgage comparison tool is also a great way to save time. Every day, more and more mortgage lenders are teaming up with digital platforms to bring their rates and offerings closer to the people who are shopping for them. Simply entering basic information such as mortgage type, purchase price, down payment, rate type and the province you are in will show preliminary rates from dozens of lenders before the application process even begins.
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What to Give to Your Mortgage Broker
When you are ready to start the mortgage pre-approval process, you must have some information handy for your mortgage broker, or have on hand if you are applying online. Below are some of the things you need to have prepared. Assembling all of your documentation can take time so begin preparing long before you are ready to apply.
This personal information includes your name, date of birth, SIN (Social Insurance Number), and current address.
Sharing personal information can be daunting, but your mortgage broker follows strict confidentiality rules. They will only use your information to help you secure the best possible mortgage for your situation.
2. Investment and Banking Information
While having investments isn’t mandatory for getting a mortgage pre-approvals, they certainly can help. It shows lenders that you make wise financial decisions and you are able to allow your money to grow without withdrawing on it. Banking information on the other hand you will need. Providing your bank statements proves you have the funds to pay your mortgage dues.
3. Proof of Net Worth
How much money you really have isn’t just calculated by the funds in your account. Your lender will determine your net worth by the properties, cars, boats, and other items you own. Included must be the addresses, the value of the properties and items, and how much you pay monthly. Your assets are another integral part of the mortgage pre-approval process. A mortgage broker needs to know about any savings or investments you have that you can use as collateral.
4. Proof of Income and Employment
Proof of income will be required to ensure the potential lender can see that you have sufficient funds coming in to be able to carry your mortgage. Bank statements and or letter of employment will be fine. If you are self-employed, you will be required to provide an NOA (Notice of Assessment) for the past two years as well. If you do not have a long employment history, or if you have gaps in your employment, you’ll have a chance to explain them to your mortgage broker. You may still qualify for pre-approval for a loan, but it could be more difficult. Be honest with your mortgage broker about your employment history so that they can provide you with the best possible advice.
5. Debt Information
Your income is one of the most vital factors in getting pre-approval for a mortgage. Brokers use this information to calculate your debt-to-income ratio, which is a factor in determining whether a mortgage company will approve you for a loan.
One rule of thumb when applying for a mortgage pre-approval is to never attempt to hide your debts. Lenders have access to multiple databases where information about your existing debt (if any) is stored. Be up front and provide the documents on what you owe. This could be your vehicle, student loans, personal loans, lines of credit and credit cards. Child and spousal support are also considered debt.
Things to Consider When Applying for a Mortgage Pre-Approval
One of the biggest mistakes that homebuyers make is not understanding the costs associated with buying a house. The actual cost of the property is not the only financial obligation homeowners have. When shopping for a pre-approved mortgage, also consider the following:
1. Mortgage Application
A mortgage application is a request by a potential borrower to a lender for financing to purchase a home. Mortgage applications contain detailed information about the borrower’s finances, employment history, and credit history.
The lender uses this information to determine whether the borrower is a quality candidate for a loan. Should you qualify, it also lets them know how much money to lend. In some cases, a mortgage broker or lender may charge a fee for the application to compensate for their time. That fee could be anywhere from $0-$500.
2. Appraisal Fee
When getting a mortgage, one of the fees you must pay is an appraisal fee. This fee charged by the lender goes towards having a professional appraiser assess the value of the home you want to buy. The appraisal fee is typically around $300, but it can vary depending on the house’s price and location.
3. The Down Payment
The down payment is typically the largest chunk of money you need to come up with and goes towards the house’s purchase price. The size of your down payment affects the number of your monthly mortgage payments. It also impacts the amount of interest you will pay over the life of the loan, so you must plan accordingly.
The amount you pay will depend on the type of mortgage you request in your application. Typically, the down payment is between 3% and 20% of the home’s purchase price.
If you can make a larger down payment, you may be able to get a lower interest rate on your mortgage. Doing so can save you money over the life of the loan. But even if you cannot afford a large down payment, many options are available to help make homeownership possible.
If you are unsure how large of a down payment you can afford, talk to a mortgage lender about your options. They can help you determine what type of loan would be best for your situation and how much money you need to get started.
4. Home Inspection
When shopping for a home, one of the fees you may encounter covers a home inspection. You will pay a professional inspector to visit the property you want to buy and look for any defects.
The home inspection fee can range anywhere from $200 to $500, depending on the size and complexity of the home. The inspector will use this fee to cover the cost of their time, equipment, and any additional costs associated with the inspection, such as travel costs.
While you do not need to invest in a home inspection to get a mortgage, it is wise to get one anyway. That way, you can be aware of any potential problems with the property before you commit to buying it. A home inspection establishes trust between you and the home seller to get a clear picture of the state of the property. If there are any issues, you can negotiate with the seller to fix them before you close on the property.
5. Closing Costs
A lender may charge closing costs at the closing of a real estate transaction. These fees can vary depending on the lender but usually range from 2% to 5% of the loan amount. For example, on a $200,000 loan, you might pay $4,000 in closing costs.
Some closing costs are due upfront at the time of closing. Others may be due at different times throughout the life of the loan.
For example, you may have to pay origination fees, appraisal fees, and title insurance premiums at closing. But you may also be responsible for paying prepaid interest, property taxes, and private mortgage insurance over the life of the loan. Ask your lender for a detailed breakdown of all anticipated closing costs before you apply for a mortgage. If you would like to do the calculations yourself, using a closing cost calculator like this one is a great way to pre-determine what those figures will be.
One way to offset closing costs is to see if your lender offers any programs that can help cover some of the expenses. Many lenders offer a no-closing-cost mortgage, where they absorb some fees in exchange for a slightly higher interest rate.
6. Moving Costs
Moving costs can add up quickly. Therefore, you must be aware of all the potential expenses before you start packing.
The best way to estimate your moving costs is to contact a few different moving companies and get quotes. Be sure to ask about any hidden fees or charges so that you can compare these companies. Once you have a few estimates, you can better budget your move.
What Happens If a Lender Rejects You?
Understand that there are many reasons why a lender may reject your loan application. It could be something as simple as a typo on your application or an error in your credit report. Or, it could be something more serious, like a change in your employment status or an increase in your debt load.
Another reason why a lender may reject your application is if you do not have enough money saved for a down payment. Lenders usually like to see at least 20% down before approving a loan. Whatever the reason for your rejection, remember that facing rejection from one lender does not mean all lenders will reject you.
If a lender rejects you for a mortgage loan, the best thing to do is to talk to your lender and find out why. They may offer suggestions for improving your application or help you correct any errors. Once you have this information, you can reapply with another lender or try again with the same lender.
Questions You Should Ask Your Broker During the Pre-Approval Process
Asking questions is a critical part of the mortgage pre-approval process. Your mortgage broker is there to help you understand and guide you through your pre-approval. Below are some questions you should ask your broker about the mortgage pre-approval process.
Inquire About Interest Rates
Ask about the interest rate and what factors could influence a mortgage lender during the pre-approval process. You want to know what interest rate you can expect and the variables that make a difference, such as your credit score or the loan type you seek.
Ask About Closing Fees
Inquire about fees and closing costs. Ensure that you ask about any fees associated with the loan and get an estimate of closing costs. After obtaining this information, you can factor them into your budget.
Ask How Long the Process Will Take
Find out how long the pre-approval process takes. Processing times vary depending on the lender. Ask the lender so you can plan accordingly.
Inquire About Loan Conditions
Ask if there are any conditions attached to the pre-approval. For example, some lenders may require that you purchase private mortgage insurance if your down payment is less than 20%. Know the terms of your deal before proceeding.
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Get the Best Pre-Approval Mortgage Rates in Canada
Insurdinary helps prospective homeowners get the best mortgage rates in Canada. We work with Homewise, a Canadian mortgage broker, to compare rates from the top mortgage companies nationwide, letting you take the headache and hassle out of shopping for a mortgage. Getting quotes from multiple lenders one by one is time consuming. Comparing side by side quotes at the same time is an excellent way to give you a snapshot of what your mortgage rates will look like.
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