Mortgage Pre-Approval

A mortgage pre-approval certificate states the maximum amount of money a lender is willing to loan you, based on your current income and credit history. It will specify a term, interest rate and mortgage amount. The pre-approval will be valid for a period of time and may have conditions that must be met.

Why get pre-approved?

• It will save you time in the long-run; you will only look at the homes you can afford.
• You will have a reference point to decide on an offer for a house.
• You will be more informed regarding budgeting; monthly mortgage payments and down payment.
• Sellers may take your offer more seriously, and give you more negotiation power, if you have been pre-approved.
• You will be able to lock in on a mortgage rate in case the rates during your home search go up.
• Getting a pre-approval from one lender does not lock you into using them when you purchase the house. You could decide to use another lender afterwards.

Note: Having a pre-approval amount does not guarantee that you will get the mortgage for that amount. The approved amount will depend on the value of the home and the amount of the down payment. It also doesn’t mean you should buy a house at the top of your price range. Using a lower amount will help pay off your bills such as closing costs, moving costs, ongoing maintenance costs and the ability to grow your savings.

Difference Between Pre-Qualified and Pre-Approved Mortgages?

Pre-Qualified Mortgage:

• Quick process.
• Can be done over the phone or online.
• You provide personal financial information such as: income, debts and assets
• A tentative assessment is provided (how much the bank is willing to lend you towards a home)
• Is not a guaranteed loan

Pre-Approved:

• The lender will check your income, expenses and credit score and verify your financial information.
• If approved, the lender is making a commitment to loan you the money (subject to conditions such as a property valuation).
• Pre-approval will be valid for 60, 90 or 120 days depending on the lender.
• The approval and interest rate may change after this time period.

Using a mortgage broker or mortgage specialist will help you through the process.

What is the Difference Between a Mortgage Broker and a Mortgage Specialist.

Mortgage Broker:

• A middle man (or woman) working between you and the bank.
• They do not work for a bank.
• They shop to get the best deal for you. It may be from a bank, credit union or other lender.
• They do the negotiating.
• Often, they will get a better rate since they work with smaller lenders.
• If you have issues with credit (a low credit score), a broker may find a lender for you when the bank has refused to lend you money.
• Rates are generally cheaper than from a bank.
• ​Are often self-employed.
• How are mortgage brokers paid?¹

Mortgage specialist:

• Works within a bank.
• You do the research from online websites and loan rate comparisons.
• You do your own negotiating with the bank.
• The advantage comes with brand loyalty; putting all your eggs in the same basket such as getting a mortgage and a home Equity Line of Credit at the same time.
• Many people get a mortgage from the same bank where their bank accounts are kept.
• Suggestion: you can visit with a mortgage specialist at another branch of the same bank. They will often negotiate different rates.

Mortgage Pre-Approval Process

• Discuss Financial strategy, needs, mortgage amount, down payment, purchase price etc.
• Learn your mortgage options: Fixed vs variable rates, interest terms, payment options, amortization). Decide what is best for you. 
• Please see attached Mortgage Payment Options² that highlights accelerated weekly and bi-weekly payment options. 
• Bring Supporting Documentation required to apply for a mortgage pre-approval which may vary depending on the lender.
   
• Documentation you may need to bring with you:

               -Identification
               -Social insurance number (optional)
               -Current address
               -Previous addresses
               -Current employment information (employer’s address, telephone number)
               -Previous employment information (if current employment is less than 3 years)
               -Proof of income (pay stubs and letter from your employer, bank statement confirming direct deposit, investment statement or a notice of assessment, for the last 2 years, if you are self-employed)
               -Estimated value of properties, automobiles, investments, and savings.
               -Most recent statements for mortgages, loans and lines of credit
               -Housing expenses (property tax, annual condo fee, heating costs)
               -Proof of any other assets like a car, cottage or boat
               -Proof of down payment and ability to pay closing costs
               -Information about other debts including:
                              -Most recent Credit cards and lines of credit statements
                              -Spousal or child support payments
                              -Student loans
                              -Car leases or loans
                              -Personal loans

               -Co-owner financial information as well (if applicable).

• Compile as much information as possible. The more information provided, the better prepared you will be when making an offer on a home.
• The application for a mortgage will be filled out
• You will be required to give the lender permission to obtain a credit bureau report
• Verify the information on the application: income confirmation, down payment etc.)
• If approved, the lender is making a commitment to loan you the money (subject to conditions such as a property valuation)
• The pre-approval, if obtained, is conditional on continued good credit and will be good for 60, 90, or 120 days depending on the lender. Ask if the pre-approval can be extended.
• The approval and interest rate may change after this time period.
• If the interest rate goes down during your pre-approval period, ask to have your interest rate adjusted to reflect the current rate. It is advisable to ask whether the rate will automatically be reduced during the application process.

Definition of terms:

Credit score: is a measure of your financial health and shows lenders how risky it us to lend you money.  Having a credit score above 680 will go smoothly. Having a credit score between 600 and 680 will involve more intense scrutiny of your financial history. A score below 600 will generally mean a big bank will not approve your loan and you will need to use a mortgage broker to find a lender. Or, the lender may approve your loan at a lower amount, require a larger down payment or require someone to co-sign with you on the mortgage.

Down Payment: A lump sum of money you will apply towards your mortgage. The minimum down payment, in Canada, is 5% of the home’s purchase price. If you put down less than 20%, you will be required to purchase mortgage default insurance to protect the lender in case you default on the loan. For government programs aimed at helping severated, divorced and new home buyers afford a home click here.

Ex: Buying a house worth $500,000 would require at least a $25,000 deposit.

Debt Service Ratios: Calculations used by lenders to determine the largest monthly mortgage payment you can afford, based on your monthly income, expenses and debts.

Gross Debt Service (GDS) ratio: Your total monthly housing costs such as: mortgage payments, property taxes, heating, and 50% of condo fees (if applicable) shouldn’t be more than 32% of your gross household income.

How Are Mortgage Brokers Paid? Like many financial advisers, mortgage brokers typically get paid by commission. The lender providing the mortgage pays the broker that commission (finder’s fee) for referring and managing the application and mortgage closing. On average, this compensation can range from roughly 50 basis points (0.50% of the mortgage amount) for one-year terms to 110 basis points (1.10% of the mortgage amount) for five year terms at prime lenders.¹

Property Valuation: your lender will look at the details of the property to make sure it’s suitable. If the property doesn’t meet their qualification criteria, you won’t qualify for a mortgage. For example, if the home has asbestos, knob and tube wiring, is a heritage home, or its appraised value is below the purchase price, the lender may not find it suitable and could deny you a mortgage.⁴

Total Debt Service Ratio: (Total debt load) Your total debt load shouldn’t be more than 40% of your gross income. These debts include:

-credit card payments
-car payments
-lines of credit
-student loans
-child or spousal support payments
-any other debts

Stress Test: A federal guidline that is designed to protect Canadians to ensure they can afford mortgage payments at a qualifying interest rate. They are typically tested at a higher interest than stated on the contract in case the rates go up during their mortgage period. This generally means that first time buyers won't be able to borrow as much; approximately 20% less.

The qualifying interest rate your bank will use for the stress test depends on whether or not you need to get mortgage loan insurance. For more on Mortgage loan insurance click here.

If you need mortgage loan insurance, the bank must use the higher interest rate of either:

• the Bank of Canada’s conventional five-year mortgage rate
• the interest rate you negotiate with your lender

If you don’t need mortgage loan insurance, the bank must use the higher interest rate of either:

• the Bank of Canada’s conventional five-year mortgage rate
• the interest rate you negotiate with your lender plus 2%

For example, say you apply for a mortgage at a bank and that you have a down payment of 5% of the value of the home. You’ll need to get mortgage loan insurance since your down payment is less than 20%.

Assume that:

• ​the interest rate you negotiate with your lender is 3.00%
• ​the Bank of Canada’s conventional five-year mortgage rate is 5.14%

You'd need to qualify at the higher of the two interest rates, which is the Bank of Canada’s conventional five-year mortgage rate, even if you'll be paying the lower interest rate in your mortgage contract. ³

Mortgage Payment Options

The graph below compares different payment schedules, showing your mortgage payment, final total payment with interest cost.

https://mortgageintelligence.ca/assets/calculators-mi/CAMortgageLoan.html

*Accelerated weekly and accelerated bi-weekly payment options are calculated by taking a monthly payment schedule and assuming only four weeks in a month. We calculate an accelerated weekly payment, for example, by taking your normal monthly payment and dividing it by four. Since you pay 52 weekly payments, by the end of a year you have paid the equivalent of one extra monthly payment. This additional amount accelerates your loan payoff by going directly against your loan's principal. The effect can save you thousands in interest and take years off of your mortgage.5

*The accelerated bi-weekly payment is calculated by dividing your monthly payment by two. You then make 26 bi-weekly payments. Just like the accelerated weekly payments you are in effect paying an additional monthly payment per year.5

If you are paying your mortgage on an *accelerated bi-weekly schedule your mortgage would be paid off in 22 yrs. and 4 months.

And, your savings compared to a monthly payments schedule would be $25,088 ($699,070 - $673,982) which is greater than what you would earn with some lower-risk investments.

The main advantage to paying off your home is debt freedom. The sooner your mortgage debt is paid the sooner this money will go to you. You can use the new cashflow for your retirement savings, your child's post-secondary education, or simply invest in you.6

Sources:

1. https://www.ratespy.com/mortgage-brokers-get-paid-06066294

2. https://joanhingking.com/should-i-pay-down-my-mortgage-or-invest

3 https://www.canada.ca/en/financial-consumer-agency/services/mortgages/preapproval-qualify-mortgage.html#toc1

4. https://www.ratehub.ca/mortgage-pre-approval

5 https://mortgageintelligence.ca/assets/calculators-mi/CAMortgageLoan.html

6 https://www.myownadvisor.ca/the-definitive-answer-to-paying-down-your-mortgage-or-investing/

Other sources: https://mortgageintelligence.ca/assets/calculators-mi/CAMortgageLoan.html

https://www.td.com/ca/en/personal-banking/products/mortgages/first-time-home-buyer/pre-approval/

https://champion.ca/services/mortgage-stress-test-first-time-home-buyer/?utm_source=stress-test&utm_medium=cpc&gclid=CjwKCAiAlO7uBRANEiwA_vXQ-wNKltjqf8608wi_gmgE_tqEOQ4rhIJqUXVSMBgEXk0myxM0YlN2hRoCNW0QAvD_BwE#stress-test