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Getting Pre-Approved: First Step to Buying Your First Home

Updated: Feb 5, 2019

So you saved up enough money and thinking of buying your own place? But don't know where to start? The first step is very simple: GET PRE-APPROVED! ...but what does that even mean....?

What does it mean to get pre-approved?

A pre-approval is when a potential mortgage lender looks at your finances to find out the maximum amount they will lend you and what interest rate they will charge you.

With a pre-approval, you can:

  • know the maximum amount of a mortgage you could qualify for

  • estimate your mortgage payments

  • lock in an interest rate for 60 to 120 days, depending on the lender

The pre-approval amount is the maximum you may get. It does not guarantee that you'll get a mortgage loan for that amount. The approved mortgage amount will depend on the value of your home and the amount of your down payment. It may be a good idea to also look at properties in a lower price range so that you don’t stretch your budget to its limit.

Remember that you’ll also need money for:

  • closing costs

  • moving costs

  • ongoing maintenance costs

What determines the mortgage amount I can qualify for?

1. Your credit score

Paying your bills on time helps you avoid late fees and also helps your credit score. A good payment history shows lenders you have a record of paying on time. And the longer you have that, the better. Late or missing payments negatively affect your score, as do any collections, foreclosures or bankruptcies. If you don’t have a good credit score, the mortgage lender may:

  • refuse to approve your mortgage

  • decide to approve it for a lower amount or at a higher interest rate

  • only consider your application if you have a large down payment

  • require that someone co-sign with you on the mortgage

Here in Canada, you can check your credit for free at Borrowell (without affecting your credit score)!

2. Income and expenses

Your household income and expenses will be important to determine the gross debt service (GDS) ratio and the total debt service (TDS) ratio, which the mortgage lender will use to verify your capacity to make monthly mortgage payments.

Total monthly housing costs

Your total monthly housing costs shouldn’t be more than 32% of your gross household income. This percentage is also known as the gross debt service (GDS) ratio.

These housing-related costs include:

  • mortgage payments

  • property taxes

  • heating

  • 50% of condo fees (if applicable)

Total debt load

Your total debt load shouldn’t be more than 40% of your gross income. This includes your total monthly housing costs plus all of your other debts. This percentage is also known as the total debt service (TDS)ratio.

Other debts may include the following:

  • credit card payments

  • car payments

  • lines of credit

  • student loans

  • child or spousal support payments

  • any other debts

You can use this Mortgage Qualifier Tool to see if you can qualify for a mortgage based on your income and expenses.

3. Down payment

A down payment of 20 per cent is a “rarity” with first-time buyers, according to Edmonton mortgage broker Natalie Wellings. But that’s how much you have to have down if you want to avoid paying CMHC’s mortgage default insurance. It’s calculated based on the size of your mortgage and how much money you have down.

Of course the bigger the down payment, the smaller your loan (and overall interest charges) will be. One way to help boost your down payment is to borrow money from your RRSP (Home Buyers Plan). First-time buyers can pull out $25,000 tax-free and have 15 years to pay it back. If you’re buying with your partner, you can contribute $50,000 together! However, to take advantage of this Home Buyers Plan you must be a first-time home buyer or haven’t owned a home in the last five years

Get more information on Canada's Home Buyers Plan and start saving some money on your first home purchase!

Where to get a mortgage pre-approval?

Mortgage lenders

Mortgage lenders lend money directly to you and can issue a pre-approval.

Mortgages are available from several types of lenders, such as:

  • banks

  • caisses populaires

  • mortgage companies

  • insurance companies

  • trust companies

  • loan companies

  • credit unions

Different lenders may have different interest rates and conditions for similar products. Talk to several lenders to make sure you’re getting the best mortgage product for your needs.

Although you may decide to switch lenders later, it’s important to be comfortable with the lender and the mortgage options they offer you right from the start. If you switch lenders after signing your mortgage contract, your lender may charge you a prepayment penalty. Make sure you understand the terms and condition of your mortgage contract.

Mortgage brokers

Mortgage brokers don’t lend money directly to you. Mortgage brokers arrange transactions by finding a lender for you.

Some lenders only offer their products directly to borrowers, while some mortgage products are only available through brokers. Since brokers have access to a number of lenders, they may give you a wider range of mortgage products and terms to choose from.

Mortgage brokers don’t all have access to the same lenders. This means the available mortgages vary from broker to broker. When you’re considering a mortgage broker, ask which lenders they deal with. Mortgage brokers generally don’t charge fees for their services. Instead, they usually receive a commission from the lender when they arrange a transaction.

Find a list of mortgage brokers in your area from Mortgage Professionals Canada.

As we hear often, buying a home is one of the biggest purchase you can make in your life and most real estate agents won’t even work with you until you’ve been pre-approved for a mortgage. Now that you know more about getting pre-approved, you won't start house-hunting and fall for a home you can’t afford!

Read more on: Getting pre-approved and qualifying for a mortgage

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