This section will give you an idea of what to expect based on traditional mortgage qualification guidelines. Remember that these are just guidelines and everyone’s situation is unique. To pre-qualify or get pre-approved for a mortgage, there are three essential components: your income, your equity, and your down payment amount.
Before you begin looking for your new home, you will want to know what your financial limits are. Obtaining a mortgage pre-approval lets you know exactly how much you can afford and allows you to shop with confidence.
With pre-approval, you can:
- Lock in an interest rate in case interest rates rise before you purchase a home. The length of the interest rate guarantee varies by financial institution and usually ranges from 60 to 120 days. If interest rates fall before you purchase a home, you may or may not be able to get the lower rate, depending on the lender’s policies for pre-approvals.
- Estimate your mortgage payment, so that you can include it in your budget.
- Know the maximum amount of a mortgage that you qualify for, so that you don’t waste time looking for homes that are too expensive.
A pre-approval does not guarantee that you will get the mortgage loan. Once you have a specific home in mind, the lender will want to verify that the home or property meets certain standards (ie. the condition or market value of the home) before approving your loan. At that point, the lender could decide to refuse your mortgage application, even though you had been pre-approved for a certain amount.
Keep in mind that the pre-qualified amount is the maximum you could receive. It may be a good idea to look at homes in a lower price range so that your budget will not stretched to the limit. Remember to also consider any additional costs you expect in the near future and factor in closing costs and moving costs.
Pre-approvals are based on your employment and income information, your debts or monthly obligations, and your credit history, down payment amount, and the property value.
What you will need to prepare for a pre-approval:
- Proof of employment and current salary or hourly pay rate (for example, a current pay stub and a letter from your employer)
- Position and length of time with the organization
- If self-employed, bring your Notices of Assessment from Canada Revenue Agency from the past two years
- Proof that you can pay for the down payment and closing costs
- Recent financial statements (bank accounts, investments)
- Information about your other assets, such as a car, cottage, or boat
- Information about your debts or financial obligations
- Credit card balances and limits, including those on store credit cards
- Child or spousal support amounts
- Car loans or leases, lines of credit, student loans, and other loans
- Government-issued identification
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