Step 2 to Buying a Home: Get Preapproved For a Mortgage
Once you’ve found a Realtor® to represent and advise you on what is going to be the biggest financial transaction you ever make, step 2 to buying a home is to get pre-approved by a mortgage lender. As Realtors, we won’t put an offer in on a home for a client unless he or she has been preapproved. In addition, it’s important that you have an understanding of how much you can comfortably afford to spend on a home, what your monthly payments will be, what interest rate you qualify for, and how much you’ll be paying each month in taxes, etc.
Having a good mortgage lender is a crucial part of ensuring a smooth transaction. Working with a bad mortgage lender can make the process a living hell for everyone involved and put your purchase in jeopardy of not closing on time or at all. You also might end up regretting the lender you chose for years if you end up paying a higher interest rate than you should have if you had shopped your loan through various lenders. You could also lose out on your dream property because your mortgage lender was disorganized and couldn’t get you fully approved during underwriting, etc. That’s why it’s important to work with the best. Each banks and lenders have different specialties so it’s better to check with a mortgage broker who has access to many types of loan to know which one is best for you. If you need an advice about mortgage or you need a mortgage pre-approval/approval, advise us when we meet and we will help you with the process.
Each lender has slightly different requirements regarding what documentation they need from you for the pre-approval process, but in general, expect to provide the following items:
- A completed application. The lender will provide this to you directly. If you want us to process your pre-approval, start your application here.
- Your networth in the form of assets you owned. Generally the lender needs chequing, savings, RRSPs, TFSAs, FHSAs, mutual funds, individual stock accounts, brokerage accounts, etc. If you’re using it as part of the downpayment, they need to know where original deposits came from thru your 90-day statements.
- If you’re using gifted funds for downpayment and it’s coming from outside Canada, a 90-day bank statement where the original money came from will be required by the lenders together with your 90-day bank statements and gift letter from the family member (donor).
- Most recent pay stubs if you are are working for an employer
- Past two year’s T4s
- Past two year’s T1 General Returns if you’re self-employed or you own a business
- Past two year’s Notice of Assessment
Getting a Pre-Approval Letter
Generally, once you submit the above items to your lender you should receive a pre-approval letter within 2-3 business days. The lender may ask for additional documentation. They are not trying to be difficult by asking for additional documentation, rather, after the housing bubble burst, underwriters became much stricter regarding the loan approval process so a lot more documentation is needed today than it was 10 years ago. In addition to receiving a pre-approval letter which shows the amount you can afford to purchase, you should ask your lender to show you what that preapproval amounts into in terms of a monthly mortgage payment plus any PMI, taxes, and insurance. That way you can make sure you are comfortable with what your monthly housing payment will be at that pre-approval letter. Once you’ve received your pre-approval letter, forward it to us for your file so we can have it when we are ready to submit an offer.
Get a Loan Estimate and Understand Your Closing Costs
In addition, mortgage lenders are required to provide you with a Loan Estimate (LE) within 3 days of receiving your pre-approval. The LE provides an estimate of the closing costs you’ll need on top of your down payment and shows exactly what fees the mortgage lender is charging you. Make sure you understand these fees. Generally, we estimate closing costs to be approximately 1.5% of the purchase price of the property. Here is a chart showing approximate closing costs in Toronto and GTA. Your mortgage lender can provide you with more detailed estimates based on your exact pre-approval price. Remember, these closing costs are due at closing (except for the appraisal and inspection fees which are due on the day those services occur) and are on top of your down payment. Therefore, if you’re buying a $500,000 property and putting down 20% towards the loan you’ll need to have $112,500 cash available at closing ($100,000 for your down payment and approximately $7,500 for the closing costs).
Should You Shop Your Loan Around?
Absolutely. Every lender charges different fees and different interest rates so it’s crucial you shop your loan around to at least two lenders, in my opinion. We recommend having the lenders all pull your credit on the same day though. Each lender will need to pull your credit report in order to give you an accurate pre-approval letter. If your credit is pulled by various lenders on the same day or within a day of each other it will affect your credit a lot less than if you have it pulled by various lenders weeks apart. Also, if you’re going to compare interest rates, make sure you are comparing interest rates between lenders on the same day as rates vary, even over the course of the day. So if you aren’t comparing interest rates on the same day, it’s like comparing apples to oranges. The smarter way to do this is use the service of a mortgage broker since your credit will only be pulled once and can be used to shop around rates and the good thing is, they don’t even need to do that as they have list of the rates for each lenders at their finger tips and knows the different products each lender specializes in. Be sure to disclose if you have missed payments, bad credit history right at the start so he/she would be able to know ahead what’s the best way to get your loan.
Questions about the pre-approval process? Just call us at 647-888-9999 or email us.