Buying a house is likely the largest single purchase you will ever make, and you probably don’t have all the money for it.  That’s the case for the vast majority of home purchasers in Ontario, and across the country; it means that you will have to secure a mortgage in order to close the deal.  

By definition, a mortgage is a legal agreement between you and a lender, very frequently a bank, although there are other types of mortgage providers.  By the terms of the agreement, you agree to borrow the money at interest, and pay it back.  When paid back in full, the creditor no longer holds the title – the property is fully yours.  The term mortgage is specifically applied for borrowed money involving property, as opposed to a loan, which refers to lending money for just about anything else.

Before going on a house-hunt, it is important to know that you will actually qualify for a mortgage, and for how much.  That’s why the practice of mortgage pre-approval has become pretty much standard in Ontario, and the rest of Canada.  

Let’s take a look at some of the specific aspects of mortgage pre-approval you should be aware of, when contemplating the purchase of a house.

Mortgage Pre-Approval – What It Is

Getting a mortgage pre-approval is the process by which you sit down with a prospective lender and determine:

• What the maximum dollar amount you would qualify for
• An estimate of what your (typically monthly) mortgage payments would be
• What your mortgage rate would be, typically locked in for 60 to 130 days

Your prospective lender arrives at these conclusions after examining your finances which would include at a minimum:

• Identification – proving who you say you are
• Bank account information
• Investment information
• Statement of your income, typically from your employer
• Your current debt information
• A credit check

What Types of Financial Institutions Issue Mortgages

The mortgage business is a big one in Ontario, and there are many types of lenders out there, including:

• Banks
• Credit Unions
• Mortgage companies
• Trust companies
• Insurance companies
• Loan companies

Each type of lending institution will have its own set of standards, so you will find that their processes, rates, and terms of service will vary.  It’s always a good idea to talk to several prospective lenders before making your decision. Signing with one and then switching may cost you penalty fees, so it’s best to get it right the first time, and be comfortable with your decision.

At the end of the process, you will receive a document from the prospective lender, stating the estimated amount you are qualified to borrow.

The Function of Mortgage Brokers

You may choose to engage with a mortgage broker in your search for a mortgage provider.  Mortgage brokers do not lend money themselves; their purpose is to assist you with finding an appropriate lender.  Some mortgage products are available only through brokers, while others are only available directly from the lender.  The advantage to working with a broker is that they have access to lots of lenders; additionally, they are up on the latest rates and deals out there.  Having a mortgage broker do some of the legwork for you may be advantageous.  The lending institution you select through a broker will still require you to go through the same pre-approval process as outlined above.

What to Expect From the Mortgage Pre-Approval Process

The pre-approval amount – this is the maximum size mortgage you qualify for, in dollars.  This doesn’t automatically mean you would get this amount when you find a house you want to buy.  That’s because there are other variables your lending institution will take into account when you actually apply for a mortgage.  These include:

• The value of the property in question
• The amount of your down payment

These two factors may impact the final amount the lender is willing to supply you for your mortgage.  It is vitally important that you don’t overextend yourself financially, simply because you have a pre-approval dollar figure in your head.  Your calculations may tell you that you’re within range, but the bank or lending institution may think otherwise.  Keep in mind also that there are other expenses associated with a house purchase.  They can add up to a significant additional cost, and include:

• Closing costs, such as lawyer fees, land transfer tax, etc.
• Appraisal, inspection costs
• Moving costs
• Ongoing maintenance costs
• Home insurance
• New build HST

Remember always that a home purchase is likely the most significant purchase you will ever make – all the financial details must be taken into consideration.

In the Event Your Mortgage Application is Refused

This could still happen, even with a mortgage pre-approval.  The reasons for the refusal could vary; each lender has their own standards and policies.  Very often, the type of property you select is the wildcard.  If the lending institution is not confident in the proposed deal, perhaps due to the agreed upon selling price, or that the property does not meet certain standards, the result could be rejection.  

Should this become the case, you should sit down again with your lender, and explore alternatives.  Some areas of contention which might be addressed during this process would be:

• Agreeing to pay a bigger down payment, thus lowering the mortgage amount
• Agreeing to a higher interest rate
• Having another party co-sign the mortgage with you

These are just a few of the potential remedies in the event of a refusal to approve the mortgage, on the part of your lender.  

What NOT to Do During the Mortgage Pre-Approval Process

We’ve discussed some of the important aspects and steps involved in getting pre-approved for a mortgage.  Now let’s have a look at a few things you should avoid; the following are definitely DON’Ts, when it comes to seeking a mortgage pre-approval.

DON’T Overextend Yourself Financially

We mentioned the various costs associated with a home purchase, over and above the basic mortgage amount and monthly payment.  These can have a serious impact on what you wind up being able to handle.  A great rule of thumb is use the dollar amount you’ve been pre-approved for, and use it as a guide at the extreme high end.  Say you’ve been pre-approved for a half-million dollar mortgage.  It would not be a great idea for you to find a house which, at final calculation, results in a mortgage of $500,000.  In many situations, this would definitely be cutting it too close.  A better strategy would be to indicate to your lender a need for a lower mortgage amount, and be approved for a dollar amount considerably higher. Then, when house hunting, stick to that lower dollar amount.  This would allow you some breathing room, for all the other associated expenses, and a contingency in the event of some change in circumstance.  

DON’T Make a Lot of Big-Ticket Purchases During This Period

Hold off on that new car, or boat, or renovation to your existing place.  Dramatically changing your financial status at the time you are seeking pre-approval for a mortgage could put the brakes on the original amount for which you were being considered.  It’s called your debt service ratio; avoid changing it at this time – in other words, do not take on additional debt when you are in the process of applying for mortgage pre-approval.

DON’T Seek Out New Sources of Credit

This action, too, can result in a change to your debt service ratio.  Taking out a personal loan, co-signing on a loan for someone else – these types of actions will negatively impact your pre-approval amount.  Your lender is going to assess both your existing debt level, and your available credit, as part of their decision on whether or not to pre-approve you for a mortgage.  

DON’T Quit Your Job – Maintain Your Present Employment Status

It’s never a good idea to change your employment status when seeking out pre-approval for a mortgage.  The lender is looking at a steady and predictable income, when they examine your submissions as part of the mortgage pre-approval application.  Particularly, entering into the world of self-employment, while seeking out a mortgage, will likely raise a host of red flags beside your name.  

In the event that you are laid off or terminated from your position, for whatever reason, it may be a good idea to hold off on the house hunt, and the mortgage pre-approval process.  You can always re-visit when things return to a more stable situation.

Mortgage Pre-Approval – It’s a Necessity

The idea of home ownership is everyone’s dream.  It’s fun to look at advertisements, and lists of houses for sale.  Many people enjoy attending open houses, and getting ideas for what they would envision as the perfect home for themselves and their family.  

It’s important to recognize, however, that buying a house doesn’t happen with the snap of a finger.  There are numerous steps to the process, and many parties involved.  Just consider, for example, attempting to engage with a real estate agent, and asking them to schedule some appointments and show you some houses for sale – while not being pre-approved for a mortgage loan.  It’s a potential waste of everyone’s time – the agent’s, the house seller’s, and yours – to go through these motions, without knowing what you can realistically afford.  That’s the reason why one of the first questions out of the agent’s mouth, more than likely, will be: “Have you been pre-approved for a mortgage?”  If you can’t honestly answer “yes” to that question, and provide proof if asked, there probably is no point moving forward.

The House Hunt Needs to Start With Mortgage Pre-Approval

All that said – there are a lot of resources out there to assist you in getting everything in order when considering a house purchase. Banks, mortgage brokers, other lending institutions – they can all be a tremendous aid in getting the ball rolling towards home ownership for you.  The mortgage pre-approval stage is an important one, very early in the process.  It makes a great deal of sense to get educated about the ins and outs of such a complex transaction well ahead of time.

For more expert advice on mortgage pre-approval, consider contacting a mortgage advisor today.

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