The first step in the home-buying process is getting a pre-approved mortgage. Having a pre-approval in hand tells you how much you can spend on a home as well as locking in the current low interest rate for up to 120 days which will allow you shop the market knowing you’re insulated from rate hikes in the near future. If the rate drops, your lender should honour the new lower mortgage rate when you’re ready to make your purchase.
Here are three things lenders will want to know before giving you a mortgage pre-approval.
3 Requirements for a Mortgage Pre-Approval
The lender will check your credit score.
Knowing your credit score will give lenders an inside look at your credit habits and history, and will help them decide if you’re a good candidate for a loan. You’ll be ranked on a scale of 300-900. Your rating gauges your financial health and indicates the level of risk you present to the lender. High scores are good news, and will typically secure a better mortgage rate, since you post a lower risk of defaulting on your mortgage payments.
The lender will check your employment history.
Lenders will ask for a list of your past employers, how long you’ve been with your current employer, and what your annual salary or take-home pay is. They want to make sure you consistently earn money with no major gaps in income, and that you can make regular mortgage payments over the long-term.
The lender will check your assets and debts.
Be prepared to show your past income tax records, recent bank statements and current debt amounts, including credit card balances, car loan, student loan or line of credit. Lenders want to know your debt-to-income ratio to determine if you can make each loan payment based on the income you earn and your other financial obligations. The lender will also require proof of your down payment.
Many lenders offer a mortgage pre-approval online, so the process is simple. Find a mortgage lender that you are comfortable with. If needed, your RE/MAX agent can provide a referral. Have more questions about the home-buying process, or ready to move forward with your purchase? Contact a RE/MAX agent today, or download the RE/MAX Home Buyer’s Guide, for everything you need to know about the purchasing process.
Understanding Mortgages
For the vast majority of homebuyers, a mortgage is an essential part of the purchasing process, and your choices now will impact your finances for years to come. To help make the most of your real estate investment, gain a deeper understanding of mortgages so you can make an informed decision when the time comes.
Check Your Credit Rating
Before you apply for a mortgage, be proactive and get a copy of your credit report. Once you have it, thoroughly check for errors and other items which may need to be addressed. Since your ability to get a lower mortgage rate largely depends on the information contained in your credit report, it’s important to ensure that all the information is correct.
Get Organized
Prepare the necessary documents in advance. This will save you time and ensure a smooth application process. Depending on the type of mortgage you’re applying for and your employment situation, various documents may be necessary.
Get the Stamp of Pre-Approval
Getting pre-approved for a mortgage helps you understand how much you can borrow before going through the mortgage application process. This is an important step as it will influence your decision on the upper price limit of your house purchase, and will provide some realistic boundaries before diving head first into the process.
Consider the Future
Your mortgage should be planned in accordance with your future. Your plans may change, but the end goal should always be to reduce financial risks. Think about how long you’re planning on staying in the house, whether or not you should consider saving for a larger down payment, and how much of a risk you are willing to take.
Inform Yourself
It’s important to be well informed prior to applying for a mortgage. Understanding the options and procedures involved with buying real estate will be hugely beneficial to your plans and finances. See below for a better understanding of the different mortgage types.
- Conventional Mortgage: If you have 20% or more as a down payment on the property, your bank lender will offer you a conventional mortgage.
- High Ratio Mortgage: This type of mortgage will allow you to borrow more than 80% of the property’s purchase price. Keep in mind that with this option, you will also have to pay mortgage loan default insurance.
- Vendor Take-Back Mortgage: While this is not the most common type of mortgage, it means that the seller helps the buyer purchase the property using a portion of the purchase price. This type of mortgage is more common when interest rates are higher.
- Assumable Mortgage: This type of mortgage allows the buyer to take over the same monthly payments at the same interest rate the seller was paying until the term is completed. At that point, the buyer will need to qualify for a new mortgage.
- Blanket Mortgage: This type of mortgage is restricted to housing co-ops in most cases, and occasionally condos. With this type of mortgage, the owners of the units will pay their own portion of the mortgage either by qualifying for a portion of the blanket mortgage, or by obtaining their own mortgage.
- Portable Mortgage: A portable mortgage allows you to transfer the mortgage from one property to another without penalty
Being well informed and educated on the mortgage application process is important when it comes time for you to apply. Understanding your options will be greatly beneficial seeing as this is one of the most important steps in your home buying journey.