Buying a home can be a complicated, long endeavour. A mortgage pre-approval is probably the most important first-step you’ll take in your home buying process. It can determine the type of house you’ll be able to buy, and your likelihood of getting the house you want. By working with a Richmond mortgage broker, you can receive the help you need to get this part right.
Below are answers to important FAQs about this topic. Knowing this information can help you prepare for a mortgage pre-approval strategy meeting. Your Vancouver lending advisor can answer other questions you may have.
Why can’t I shop for a house with a pre-qualification, instead of pre-approval?
A pre-qualification is different from a pre-approval. Pre-qualifications are meant to provide quick, general estimates of what you can afford, based on the likelihood of a lender giving you an approval later (i.e. it’s not a guarantee). This is just to help you understand what you’d be looking at, cost-wise, should you want to proceed with the home-buying process.Read more
Pre-qualifications can be a bit of a ‘reality check.’ After receiving a preliminary answer from a lender, you may feel more confident in your ability to make a real estate purchase. Then, you can move on to the next step, which would be a pre-approval. Or, you may decide to wait until you can save for a bigger down payment, before spending your time shopping the market, which may be fruitless otherwise.
A pre-approval is, more-or-less, a clear ‘yes’ from a lender. They are saying that, barring extenuating circumstances (such as job loss, or a poor house inspection), that you will get a loan from them to buy a house.
To others, being pre-approved is an indicator that you are serious about buying a home. Real estate agents, sellers and lenders will give you more clout at open houses or during home viewings.
With a pre-approval, you’ll be able to make actual offers on a home you want to buy. This is useful if you see one that you like, and don’t want to lose time waiting for a pre-approval, in case others are also bidding.
Pre-approvals are not once-for-all
It’s important to know that pre-approvals generally have an expiry date when it comes to the interest rates that you will be guaranteed for your loan. These can last up to a few months (it depends on the lender).
Knowing this, you won’t want to apply for a pre-approval if you’re not ready to start bidding on homes. Home shopping can take a considerable time commitment on your part.
Also, applying for too many pre-approvals can affect your credit score. This in turn, can impact your future pre-approvals and interest rates. So, this is something to consider weightily.
What information do I need to gather before I attempt to get pre-approved for a mortgage in Vancouver?
To help save you time, it would be wise to do some preliminary ‘homework.’ You should have some ‘facts and figures’ ready before you meet with a mortgage broker to discuss mortgage pre-approval options.Read more
You are certainly welcome to call and ask questions at any time. However, ultimately, any Vancouver mortgage broker will need to collect the following, provable information from you (and your spouse), to get you concrete answers from lenders. These are:
Your credit score report
Be sure that you have validated information on your credit score report. Make attempts to correct any inaccuracies. Learn more here.
Your government-issued identity document
Bring your Canadian driver’s license or passport, to verify your identity.
Your proof of income
Have your pay stubs or Revenue Canada Notice of Assessment ready (especially if you are self-employed). You’ll also want to demonstrate how long you’ve been in your current employment situation (with exact dates, title or position, and so on).
Your debts and assets
Bring proof of any debts and assets. This includes paperwork stating that you own a vehicle, RV, or other property, for instance. It may also include statements that reveal student loan debts, outstanding lines of credit, credit card balances, child support payments, car loans, and so on.
Your monthly expenses
You should keep track of all your expenses, including your car lease payments, debt payments, household bills, spending habits, and so on. Not all of this information will be needed to get a pre-approval. However, it is good to have, so your mortgage broker can advise you on future expenses you’ll need to have ready when you purchase a home.
Your down payment amount
Finally, you should bring bank records to show you have the cash on hand to make an offer on a house, with a reasonable down payment amount.
Please note that all of the above information will need to come from official, documented sources. Getting any concrete advice on pre-approvals will not work with verbal promises, nor generalized statements by you ‘just to see.’ It may take time to sit down and seriously gather your exact information.
What can increase my chances of getting pre-approved for a low-interest mortgage?
Generally, banks are looking for strong indicators that you will be able to repay your loan within an agreed-upon amount of time (called an amortization period). Having a stable income, reasonable spending habits and a high credit score would send signals that you are financially reliable. This is something you’ll need to assess yourself for. If you are not sure whether you should apply for a pre-approval, a Vancouver mortgage broker can also give you some tips.
You should especially speak to a mortgage broker if you fall under special circumstances such as:
- Being self-employed
- Using foreign income to purchase property
- Being new to Canada
- Having high net worth, but low income
- Studying in the medical, dental or veterinary professions
Below are some of the topics a mortgage broker will discuss with you:Read more
A lender’s incentive to give you a loan
You can also think of this from a lender’s point of view. Banks are not handing out mortgages to ‘be nice’ or to give people a helping hand. They are trying to earn interest on your loan. So to them, this is a revenue-earning business. It would not be a wise business decision to lend large amounts of money to someone who already bears significant debt, who doesn’t pay bills on time or who does not have a consistent work history.
Your gross debt service (GDS) ratio and total debt service (TDS) ratio
To that end, lenders will also evaluate your trustworthiness to pay back a specific amount. For example, they will look at something called your gross debt service (GDS) ratio and your total debt service (TDS) ratio. This is a calculation that assumes the home you buy should not cost more than a percentage of your total income. This includes your monthly mortgage payments, utility bills, property tax, and strata fees.
However, please remember that your other expenses may also be looked at. A mortgage lender may want to see what you spend money on, outside of your home needs and debt payments (e.g. your phone bill, groceries, child care services, entertainment costs, etc.)
So, shopping for a property that is beyond your means would not be wise. You won’t qualify for any mortgage to buy any home.
Your credit score
Another important factor in qualifying for a mortgage is your credit score. In Canada, credit scores are rated between 300 to 900.
If your credit score is between 680 to 900, you will likely be considered a prime candidate for mortgage pre-qualification. You can qualify with an ‘A level’ lender.
If your credit score is between 600 to 680, you are considered to have an average credit score. You can get a loan from a ‘B level’ lender.
If you score below 600, you may still qualify for a mortgage. However, your options will be limited, and you may end up paying more in interest than someone with a higher credit score.
How much money should I have saved up for a mortgage pre-approval in Vancouver?
Generally, it is more financially advantageous to have at least 20% of a home purchase price available for a down payment on a home (with some exceptions to the rule). This goes whether or not you want to occupy a property yourself.Read more
There are laws about how much you must have as a down payment if you don’t plan to occupy the property yourself. In this case, you must pay at least 20% up front. If you will occupy the home yourself, you can, technically, get away with a minimum of 5% as a down payment (on a home worth less than $500K).
If you choose to buy a home worth up to $1M, then the down payment requirement will be 5% on the first $500K and 10% on the remainder.
However, if you are paying less than 20% as a down payment, you will need to purchase mortgage loan insurance. This is an extra fee to insure your mortgage, in case you default on your loan. More information on mortgage insurance can be found here. Mortgage insurance can’t be used for homes that cost more than $1 million.
You can buy mortgage insurance from one of three institutions. They are:
- Canada Mortgage and Housing Corporation (CMHC)
- Sagen™ (Formerly Genworth Canada)
- Canada Guaranty
So, how much?
In truth, the down payment you need, and the mortgage you can get, will depend a lot on your specific financial situation. A mortgage broker can help you figure out those details (it can get complicated!).
To help you with some general figures, we can say this:
To be able to buy a home in the Metro Vancouver area, most people spend roughly $100K as a down payment on a condo-style property.
Of course, this can vary a lot, depending on the home chosen, and whether or not someone decides that mortgage insurance is worth the added cost for their home’s eventual resale value (sometimes, it is!). Learn more about mortgage insurance benefits here.
Please take this as an example only. This does not mean that if you only have $60K, you can’t buy a home in Metro Vancouver. It also does not mean you can get a better deal by having more than $100K to put a down payment on a home.
Ready to take the next step? Let’s talk about getting you pre-approved for a Vancouver-area mortgage today!
If, after reading the above, you feel you are ready to discuss your pre-approval options, it’s time to talk to a Vancouver mortgage broker. We’ll go through your finances and documents, and get you the best rates we can find, with the most suitable lenders for your case.
Don’t wait, let’s get the ball rolling!
We’ll get back to you within a day! A mortgage pre-approval can take 1 or 2 days after that.