Mortgage Preapproval

When you’re shopping for a mortgage, you can compare options offered by different lenders.

Mortgage lenders have a process which may allow you to:

• know the maximum amount of a mortgage you could qualify for
• estimate your mortgage payments
• lock in an interest rate for 60 to 130 days, depending on the lender

The mortgage preapproval process may be divided in various steps. It may also be called mortgage prequalification or mortgage preauthorization. Different lenders have different definitions and criteria for each step they offer.

During this process, the lender looks at your finances to find out the maximum amount they may lend you and at what interest rate. They ask for your personal information, various documents and they likely run a credit check.

This process does not guarantee your approval for a mortgage.

Mortgage brokers

Mortgage brokers don’t lend money directly to you. They 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 many lenders, they may offer a wider range of mortgage products to choose from.

Mortgage brokers don’t all have access to the same lenders. This means the mortgages available vary from broker to broker. When you’re dealing with a mortgage broker, ask which lenders they work 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.

What to provide to your lender or mortgage broker

Before preapproving you, a lender or mortgage broker will look at:

• your assets (what you own)
• your income
• your level of debt

You’ll need to provide the following:

• identification
• proof of employment
• proof you can pay for the down payment and closing costs
• information about your other assets, such as a car, cottage or boat
• information about your debts or financial obligations

For proof of employment, you may have to provide:

• a proof of your current salary or hourly pay rate (for example, a recent pay stub)
• your position and length of time with the employer
• notices of assessment from the Canada Revenue Agency for the past 2 years, if you’re self-employed

Your lender or mortgage broker may ask you to provide recent financial statements from bank accounts or investments. This will help them determine if you have the down payment.

Your debts or financial obligations may include your monthly payments for:

• credit card balances
• child or spousal support
• car loans
• lines of credit
• student loans
• any other debts

What to do if a lender refuses your mortgage application

A lender could refuse you for a mortgage even if you’ve been preapproved.

Before a lender approves your loan, they’ll verify that the property you want meets certain standards. These standards will vary from lender to lender.

Each lender sets their own lending guidelines and policies. A lender may refuse to grant you a mortgage if you have a poor credit history. There may be other reasons. If you don’t get a mortgage, ask your lender about other options available to you.

Other options may include:

• approving you for a lower mortgage amount
• charging you a higher interest rate on the mortgage
• requiring that you provide a larger down payment
• requiring that someone co-sign with you on the mortgage

How does a mortgage work?

A mortgage is a loan that’s specifically used to purchase a home. Since most people won’t have enough cash to pay for a home, they need a mortgage from a financial institution or private lender to help pay the balance. Once you have a mortgage secured, you make payments on an agreed schedule. Every mortgage is different, but they all have similar components that you need to be aware of and understand.

Interest rates

When people think about mortgages, the first thing that comes to mind is typically the interest rate. The interest rate is the cost of borrowing.

For example, let’s say the current interest rate is 2%. That means you would pay $2 for every $100 borrowed. This is a very simplified answer as other factors come into play, but you get the idea.

When interest rates are low, the cost of borrowing is cheaper. That means you could potentially borrow more. On the other hand, if rates go up, so do your monthly payments, affecting how much home you can afford. The interest rates lenders offer are based on the prime rate from the Bank of Canada. Rates can change at any time, so be sure you know what the current rates are.