When you're looking to buy a new home it’s important to get your finances in order. A mortgage pre-approval means working with a lender to determine the amount you can borrow so you can purchase your new home. They will analyze your finances and determine if you're a good candidate for a mortgage. Once you have a pre-approval, you can go shopping for your new home with a clear budget in mind, saving you time and effort.
In order to obtain a pre-approval, though, here are a few things you'll need.
1. Downpayment and Closing Costs
Saving up for your dream home can take a while. However, budgeting, saving, and cutting costs will all be worth it once you get pre-approved for a mortgage. That being said, you will need the full amount for both the down payment and the closing costs before this can happen. This proves to a lender you are taking buying a home seriously.
2. Income Information
You will also need proof of income so your lender knows you can afford to pay the mortgage. This means you need paystubs, proof of any bonuses, and your recent T4. You may require two months worth of pay stubs or as many as two years worth, depending on the lender. Your T4 has to be provided to you by your employer at the end of each tax year and will show the lender your annual earnings and tax deductions.
3. Employment Verification
The lender usually will want employment verification, in the form of an Employment letter. This is to ensure you have a steady and stable income. If you are self-employed you will have to provide more details, most commonly your business license. Lenders are looking to lend to those that have steady incomes as it’s a safe investment for both parties.
4. Personal Documentation
You will need a piece of government-issued ID as well as your SIN (social insurance number) so a credit check can be performed. This requirement of the mortgage pre-approval process is pretty straight forward and a qualified lender will let you know if they require any other personal identification or information.
5. Good Credit
We recommend paying down (or eliminating) as much debt as possible before going trying to get pre-approved. You want to establish you have good credit in order to gain the trust of the lender who will then be more likely to offer you a larger amount and/or better interest rate. Good credit is important in showing them you can be counted on to pay back your loan.
6. Proof of Financial Assets
In addition to proof of income, you need to disclose any and all of your existing financial assets. This includes your vehicle, any other real estate you own, as well as your retirement savings. Existing assets work in your favour as they prove you already have possessions of value and you're already capable of meeting pre-existing debts.
7. Proof of Liabilities
This is where you would disclose any current loans or mortgage payments - in short, any debts you're currently carrying. This includes credit card balances, lines of credit, student loans - even child support payments. It's very important to be honest here; missing even one liability can get you declined and you'll have to start the process all over again.
8. Gift Letter
This applies to those who have been given their down payment amount as a gift from a friend or relative. You need to prove the money was given to you, rather than loaned, in the form of a gift letter. This shows the lender the amount has been approved to be used as a down payment. You can find examples of a gift letter for a mortgage online.
9. Your Actions After Pre-Approval
Remember, your pre-approval isn’t your actual mortgage approval so any changes in your life could influence your interest rate. This means you'll want to avoid making any major purchases, such as a car or new furniture, and you don't want to switch jobs or careers. Any of the above can result in the lender having to re-evaluate your finances and you may lose your locked-in rate, or your approval entirely.
Mortgage pre-approvals portray you as a serious buyer, making it easier for you to land the home of your dreams. For more information, consider speaking to your developer's preferred lender to see what other benefits might be available to you.