Mortgage Pre-Approval Process in Canada | Fivewalls

Getting a pre-approval for a mortgage is an important step in buying a house. By going through the process, you will have a good idea of how much money a bank will loan you. The first thing you will want to do is choose a lender to borrow your mortgage from. Lenders offer different rates, which fluctuate, so stay on top of them and decide which lender will work best for you. 

Once you have connected with a mortgage specialist, they will talk to you about your monthly income and what payments will work best for you, as well as your down payment. Being pre-approved can also make your offer stronger as most sellers prefer to see buyers with secured financing.

So, how does the pre-approval process work in Canada? What do you need to give to the bank when applying? How do they determine how much you can afford?

What is required in the mortgage pre-approval process?

To get pre-approved for a mortgage, you will have to prepare and present some documents to the bank. The institution will want to know who you are, how much money you have, how much you make, and what your other debts are. Once they have all this information, they will be able to tell you what mortgage amount you qualify for.
The documents required in the mortgage pre-approval process include:

• Identification to prove who you are including a driver’s license, passport, or birth certificate.
• Proof of employment which may include:
  • Proof of your salary
  • Proof of pay rate from a pay stub and a letter from your employer
  • Position and length of time with the organization
• Information about all of your assets like a car, boat, or cottage.
• Information about your debts and financial obligations, including:
  • Credit cards
  • Child support payments
  • Car leases or loans
  • Lines of credit
  • Student loans

The bank will also look at the credit of all applicants to evaluate the approval. Since a credit score is a metric that evaluates how reliable you are paying off debts, having a low score may disqualify you even if you make enough money and don’t have other debts.

Mortgage Pre-Approval Process in different scenarios:

Buying property alone: When purchasing a property alone, you will only need to submit this information for yourself. Then the bank will review your finances and give you an answer based on that information.

Buying property with another person: Purchasing with a significant other will mean including information about their finances too. This could be good or bad, depending on what your partner brings to the table. It could mean the bank will approve you for a larger loan because of your combined income, or they may lower it if your spouse already has a lot of debt. The credit of both parties will be checked, so this will also be a factor in the approval process.

Buying property when you are self-employed: Purchasing property as a self-employed individual will still require providing proof of income. If you are self-employed, you need to provide proof for a longer timeline. The bank will ask for Notices of Assessment from the Canada Revenue Agency that covers the last two years.

Who can qualify to get a mortgage in Canada?

Anyone who is a citizen or legal resident is allowed to buy property in Canada. Once that is covered, the bank is mostly concerned with having you prove that you reliable make enough money to pay back the mortgage. The bank will look at how reliable you are by checking credit scores. Then they will look at how much money is coming in and how much is going out to pay for expenses. Evaluating these criteria will allow the bank to tell you how much you are approved.

How much mortgage can I afford?

The amount a bank will approve you for depends on how much money you make. They look at your gross monthly income to determine your gross debt service and whether you would be able to afford the payments. Your total housing costs can’t be higher than 32% of what you make every month. The banks total up what you would pay for a mortgage, property taxes, utilities, and homeowner fees and will only approve you for a payment that will be lower than your maximum amount.

Debt load is another important metric that banks use. Here, the payments for every debt are added up to see your monthly obligations. The total amount you spend on debt won’t be allowed to go over 40% of gross income.

How long does the mortgage pre-approval process usually take?

Going through the approval process usually takes 1-3 days after the application and supporting documents are given. Some banks may be able to expedite the pre-approval for an additional fee.

When the pre-approval is successful, the bank will give you a letter that serves as evidence that they have reviewed your finances and are willing to give you a loan. The letter is valid for 60-90 days, depending on the issuing bank. 

What is mortgage amortization, and how long do people usually make it?

This is the length of time you will pay off your mortgage. The maximum amortization period you can choose (in Canada) is 30 years, which is the most common for people to choose. You will be paying a lower monthly mortgage payment, however the overall total interest you pay will be higher. 

Depending on what down payment you plan to pay and how large the property is, that will determine the best rate. The standard term is 25 years, but that can be adjusted. Depending on your mortgage, this does not necessarily mean you will have your mortgage paid off in 25 years. You can make repayments of any lump-sum you want towards your mortgage. 

Repayments mean payments towards your loan. Repayment frequency is how often you are paying the loan back whether that be bi-weekly, or monthly. First time home buyers may not be able to budget for repayments and a shorter amortization period, therefore 25 years is the popular choice. 

A shorter loan will mean higher monthly payments, but you will pay less in total because the interest will have fewer years to accumulate. Always make sure you are taking into consideration if there will be changes in your career or life within the next few months as you are house hunting, and how many years you are looking to pay your mortgage. Making payments over a longer period of time means a higher interest rate but making payments over a shorter period of time means lower monthly payments.

Types of Mortgages

When you decide on a house and lender, the next step is to look at which mortgage will work best for you. Every case will be different, depending on your income and lifestyle or changes in the near future. A variable rate mortgage is a mortgage where the interest rate is adjusted to reflect the market. It can increase or decrease without your knowledge beforehand. Because it can increase in the future unexpectedly, your monthly payment is lower.

Your lender will also typically give you a lower rate, to begin with. 

Fixed-rate mortgage means the interest rate remains the same throughout your entire agreement and you are “locked-in”. Although the rate may be slightly higher in this case, your monthly payments are set in stone and will never change unexpectedly. 

Having an open mortgage means you can make large mortgage payments at any point in time, without penalty. This is a good option for people whose income vary and they make more money some months than others. The interest rates are lower with open mortgages and you may possibly pay off the mortgage sooner. You can read more about what happens when you break your mortgage contract and penalties involved.

Getting mortgage default insurance

If you are unable to place enough of a down payment, then it is legally required to get insurance. Any down payment that is under 20% will require getting the insurance. Houses that are worth more than $1 million won’t need mortgage default insurance because these properties require at least 20% down to get a loan.

The increase in loan cost thanks to this insurance will be a 2-4% increase in premium on top of the cost of the loan.

The major providers of mortgage insurance in Canada are CMHC, Genworth, and Canada Guaranty.

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Questions to Ask Your Mortgage Lender

Purchasing a house is one of the biggest investments you will make in your life! Finding the right mortgage lender to go through is just as important as finding a home. They are the ones financing your purchase and making it possible.

As you meet with your lender, make sure you are asking as many questions as possible.
 

1. Which Mortgage Option Is Best for Me?
There are a few different mortgage options which cater to people’s needs. Depending on what you can afford if you are retired and if you want to be able to make extra payments throughout the year, you will have many mortgage options.
 

2. How Much Down Payment Is Required?
Most lenders will encourage you to put a higher payment down, like 20% of the price (if you can afford it). Otherwise, 5% is required on the first $500,000 and 10% on the remaining amount. If you are purchasing a condo, some condos will require a higher down payment than 5%. But your lender can help you accordingly.
 

3. What Is the Current Interest Rate?
This may seem like an obvious question to ask, but it is important. Different lenders will offer different rates. Your credit score can also affect the interest rate you are charged. If your credit is poor, expect it to be higher.
 

4. What Will My Monthly Mortgage Payments Be?
Asking your lender to give you a definite answer of what you will need to budget for every month will be helpful in getting started. They can easily calculate estimates for you, depending on which mortgage rate and term you decide on.

Say you buy a $450,000 house and are approved for a mortgage through your lender (minus the 5% down payment of $22,500). If they are offering a fixed rate mortgage of 3.64% for an amortization period of 25 years, the monthly payment total will be $2,166,09.

If you buy an $800,000 house and you have a five-year fixed rate mortgage of 3.64% and an amortization period of 25 years, your monthly payments will be $3,521.48. 

There are lots of numbers involved and whatever lender you decide to go with can help you roughly decide your budget.  

5. Will There Be A Prepayment Penalty?
If your mortgage is closed, there will be no option for prepayments, which means you cannot put money towards your mortgage whenever you please. If you would like to make extra payments, ask your lender what your options are so you will not be charged a fee. Make sure they tell you how much extra you can pay, because there will be a limit even as an open mortgage.
 

6. Are there extra fees with getting a mortgage?
There will be extra costs associated with your loan like:
 

• Appraisal fees
• Legal fees
• Credit report
• Recording fees

 
Ask for an estimate so you can budget for these extra costs and not come across any surprises.

Conclusion

With a better idea of how the loan pre-approval process works, you’ll have a better idea of what kind of property a bank is likely to help you finance. By taking an inventory of all income, debts, and assets, there won’t be any surprises when shopping for a new Canadian property.
 

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